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We have reaffirmed our Neutral recommendation on Volcano Corporation (VOLC - Analyst Report) based on the company’s disappointing third quarter 2012 and a sluggish prelim result for the fourth quarter that was released on January 7. The stock currently carries a Zacks Rank #4 (Sell). However, strong pipeline development and encouraging growth trend are expected to offset the near-term challenges.

Why Maintained at Neutral?

Volcano Corporation’s third-quarter performance was mixed as earnings per share (EPS) were in line with the Zacks Consensus Estimate, while revenues missed the mark. Several challenges including a weak domestic PCI market, transition to a direct sales model in Spain, bi-annual price cuts in Japan and pressure on margin, which are currently at play, forced the company to lower its 2012 outlook. Adding to our worries, recently, the company released its preliminary fourth quarter result with expected revenues of $102.5 million, which once again fell short of the Zacks Consensus Estimate ($106 million).

However, in spite of all, the expected fiscal revenues of $381.9 million were up 11% year over year (up 12% at CER), marginally ahead of the Zacks Consensus Estimate of $380 million and within the company’s guided range of $380–$384 million. We are also encouraged with the company’s pipeline development, with many products, slated for release over the next few quarters. We also believe that favorable industry trends should aid growth of the company. At present, clinicians and hospitals are facing increasing pressure to justify the medical necessity of PCI therapy.

Over the past 60 days, none of the 15 firms covering the stock made any estimate revisions for the current fiscal, implying that they still hold a similar view on the stock.

Other Stocks to Consider

While we prefer to remain on the sidelines on Volcano Corporation, other medical device stocks worth a look are Haemonetics Corporation (HAE - Analyst Report) and Nxstage Medical Inc. (NXTM - Snapshot Report). Both the stocks carry a Zacks Rank #1 (Strong Buy).

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