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On Mar 5, 2014, Zacks Investment Research downgraded Mindray Medical International Ltd (MR - Analyst Report) by a notch to a Zacks Rank #2 (Buy).

Why the Downgrade?

Mindray Medical International Limited (MR - Analyst Report), the Chinese medical device maker, reported stronger-than-expected fourth-quarter 2013 results on March 3. However, increasing leverage ratio, decreasing gross and operating margins, as well as a weak domestic market disappointed investors as share price dropped 8.3% since the earnings release.

Mindray’s net revenues grew 16.5% to $368.4 million, surpassing the Zacks Consensus Estimate of $348 million. While international revenues grew 23.8%, revenues from China grew at a slower pace of 8.3% due to delays in purchasing activities.

Mindray expects Western Europe and certain other emerging markets to continue to perform well and contribute to top-line growth in 2014. However, a sluggish market in China remains a matter of concern for the company’s earnings going forward.

As of Dec 31, 2013, Mindray’s long-term debt-to-equity ratio was 0.15 compared with 0.04 as of Dec 31, 2012. The stark increase in this ratio within a year, leading to a 55.0% increase in interest expense year over year, is likely to disappoint investors.

Adjusted gross profit rose 12.6% to $207.8 million but gross margin declined 200 basis points (bps) to 56.4% in the quarter due to increased cost of revenues. Adjusted operating profit went up 14.1% to $72.0 million but operating margin dipped 50 bps to 19.5% due to increased selling, general and administrative expenses and higher research and development expenses.

Subsequently, the company has seen a negative trend in earnings estimate revisions in the past 7 days. For the current quarter, one estimate moved south in the past 7 days, with no upward revision in the same time frame. This trend has caused the consensus estimate to move down by 2 cents to its current level of 38 cents over a week.

Other Stocks to Consider

Other stocks in the medical instruments industry with a favorable Zacks Ranks include Cynosure Inc. (CYNO - Snapshot Report), Natus Medical Inc. (BABY - Snapshot Report) and Syneron Med Ltd. (ELOS - Snapshot Report). All the three stocks sport a Zacks Rank #1 (Strong Buy).

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