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On Mar 20, we upgraded our recommendation on Accuray Inc. (ARAY - Analyst Report) to Neutral from Underperform. Despite posting wider losses in the second quarter of fiscal 2013, the company managed to beat both earnings and revenue estimates.

Why the Upgrade?

Accuray’s second-quarter fiscal 2013 adjusted loss of 30 cents per share was narrower than the Zacks Consensus Estimate of a loss of 34 cents. Adjusted revenues of $77.7 million beat the Zacks Consensus Estimate by $3.7 million, despite a 24.5% decline from the prior year. The results surpassed the guidance provided by the company in January on the back of solid service revenues.

Following the release of the quarterly results, the Zacks Consensus Estimate for loss per share for both fiscal 2013 and 2014 remained unchanged at 90 cents and 27 cents, respectively. With the Zacks Consensus Estimates for both fiscal years showing no clear directional pressure on the stock in the near term, the company now has a Zacks Rank #3 (Hold).

Despite a decline in product revenues at an alarming rate, solid revenues from services are keeping the company afloat. Additionally, we are upbeat about the compelling prospect in radiation oncology rendered by TomoTherapy. New products and service margin expansion are expected to be tailwinds for the company.

However, management cited certain internal issues that delayed the launch of the company’s latest technologies and widened its losses. In an effort to remediate the shortfall, Accuray announced a major restructuring program and issued convertible notes to strengthen its balance sheet, which appears to be encouraging.

Other Stocks to Consider

Medical instrument companies such as Cyberonics (CYBX - Analyst Report), Given Imaging and Abiomed (ABMD - Analyst Report) are worth considering. While Cyberonics and Given Imaging carry a Zacks Rank #1 (Strong Buy), Abiomed carries a Zacks Rank #2 (Buy).

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