Still Neutral on Cepheid

On Feb 5, 2013, we reaffirmed our Neutral recommendation on Cepheid Inc (CPHD - Analyst Report) following the fourth quarter 2012 results. While the return to profitability in the most recent quarter was encouraging, we believe that the company’s progress to tackle near-term headwinds has been stubbornly slow.

Why the Reiteration?

Cepheid reported adjusted earnings per share of 11 cents in the fourth quarter on Jan 24, better than the Zacks Consensus Estimate of break-even earnings per share and 6 cents per share in the year-ago quarter. Revenues surged 15.4% year over year to $92.4 million trailing the Zacks Consensus Estimate of $94 million.

Growth was single handedly led by the commercial clinical franchise as system placements under High Burden Developing Countries (HBDC) remained choppy. Cepheid should benefit from soaring demand for its offerings. While the demand for Xpert MRSA continues to surge, the company is currently focused to meet the higher demand for its Xpert Flu test due to a burdensome flu season. Also worth mentioning in this context is that Xpert CT/NG tests is expected to be a major catalyst for 2013.

The company is set on a growth trajectory as the molecular diagnostic wing is the fastest growing segment of the healthcare industry. Going forward, Cepheid should gain from normal manufacturing operations after addressing the underlying issues, which negatively affected the financial results in the second half of 2012. Moreover, it plans to triple its production capacity in 2013.

While the company is better positioned for execution in 2013, the disappointing outlook failed to meet the Zacks Consensus Estimate reflecting volatility in HBDC program revenues due to choppy system placements. Adding to Cepheid’s woes, the capital spending environment in the domestic market remains unyielding.

Other Stocks to Consider

With the gloomy prediction for 2013, we are wondering whether Cepheid’s business model can keep the positive momentum going. The estimate revision trend also reflects that the stock is presently out of favor. Accordingly, the stock carries a Zacks Rank #3 (Hold). While we remain on the sidelines for this molecular diagnostic company, medical stocks like ResMed (RMD - Snapshot Report), Cyberonics (CYBX - Analyst Report) and Hanger Orthopedic (HGR - Analyst Report) are expected to do well and warrant a look.