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On Nov 29, we downgraded our recommendation on SurModics Inc. from Neutral to Underperform following below par fourth-quarter fiscal 2013 (ended Sept 30, 2013) results and a disappointing guidance for fiscal 2014.

Why the Downgrade?

Though SurModics reported higher-than-expected earnings in the final quarter of fiscal 2013 due to cost savings, revenues were below expectations hurt by below par hydrophilic coating revenues. Moreover, the company reported lower-than-expected revenues as well as earnings in fiscal 2013.

SurModics’ lackluster earnings guidance for fiscal 2014 is also disappointing. We have trimmed our fiscal 2014 estimates (earnings as well as revenues) following the disappointing performance of the company and the bleak fiscal 2014 outlook.

The negative sentiment is also reflected by the downward earnings estimate revisions witnessed by SurModics. The Zacks Consensus Estimate for fiscal 2014 currently stands at 88 cents per share, down 7 cents since the earnings announcement due to the downward revisions.

Moreover, we believe that since royalties are a major source of revenues at SurModics, any royalty related setback like the discontinuation of Johnson & Johnson’s Cypher stent in 2011 will affect the top line significantly.

In view of these negatives, we have downgraded SurModics to Underperform. We believe that there is little reason for investors to hold on to the stock at current levels. SurModics carries a Zacks Rank #5 (Strong Sell) in the short run.

Other Stocks Worth Considering

Some better-ranked stocks in the same sector include Advaxis, Inc. and NuVasive, Inc. . Both these stocks have a Zacks Rank #2 (Buy).

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