ArthroCare Downgraded to Hold
The near-term should be difficult for ArthroCare Corp. (ARTC - Analyst Report) investors as the company navigates the delayed filing of financial statements, FBI probe, and class action suits. The Centers for Medicare and Medicaid Services’ non-coverage determination combined with the DiscoCare litigation will likely damage the Spine segment. Our recommendation moves to Hold.
The company’s clear strategy to leverage its patented Coblation technology and other innovative, clinically superior surgical devices for the surgical treatment of soft-tissue conditions should help pull them through this difficult time. New products in Sports Medicine are stimulating growth in a fairly mature segment. Oncology also represents another growth opportunity for the company.
Given the current headline risk, we are surprised that the company trades at an 8% premium to the average of comparables 1.2x 2008 P/E/G. We believe most health plans and governments will seek to cut costs. We are adjusting our estimates to reflect the potential fallout as the management is diverted from normal business operations. Using a blend of P/S and P/E/G, we value the stock at $33.