On Sep 26, we retained Neutral recommendation on Wright Medical Group Inc. ( WMGI). Although the company is aggressively trying to turn the business toward high-growth areas of the market, we remain on the sidelines regarding WMGI due to internal as well as external issues plaguing the company.
Why the Retention?
On Aug 5, Wright Medical reported second-quarter 2013 adjusted loss per share from continuing operations of 13 cents, which was in line with the Zacks Consensus Estimate. The loss was wider than the year-ago level of 2 cents per share.
Net revenues from continuing operations in the quarter were $60.6 million, up 17% year over year. However, it significantly missed the Zacks Consensus Estimate of $123 million. Revenues were mainly driven by 30% growth in the worldwide Ankle and Foot franchise. The company has considered its OrthoRecon unit as a part of its discontinued operations due to its recent agreement to divest the same.
The company’s earnings have managed to comfortably beat the Zacks Consensus Estimate in 3 out of the last 4 quarters, while meeting the same in the second quarter, with an average surprise of 111.11%. However, following the earnings release, the Zacks Consensus Estimate for 2013 and 2014 remained unchanged at 55 cents and 41 cents per share, respectively, over the last 30 days.
The decision to sell off the OrthoRecon business bodes well for the company, as it can now focus on expanding its high-growth Extremities and Biologics segments. The Ankle and Foot product line is growing at a healthy double-digit rate, a trend which is expected to continue. Wright’s focus on niche technologies lends some support amid economic cyclicality. Moreover, new deals in extremities are expected to bolster growth.
However, the recent regulatory issue regarding the newly-acquired BioMimetic’s flagship product has moderated our view regarding near-term catalysts for revenue growth. We are also cognizant regarding pressure on the company’s operating margin, which is likely to increase with various restructuring activities following the divestment of the OrthoRecon business.
Other Stocks to Consider
While we remain on the sidelines regarding Wright Medical, other medical stocks that are worth considering include, Alere ( ALR), carrying a Zacks Rank #1 (Strong Buy), and Advaxis ( ADXS) and Boston Scientific ( BSX), both carrying a Zacks Rank #2 (Buy).