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Recently, we have reaffirmed our Neutral recommendation on Volcano Corporation (VOLC - Analyst Report). Although we are concerned about the company’s disappointing fourth quarter 2012 and conservative outlook for 2013, strong pipeline development and encouraging growth trends are expected to offset the near-term challenges of this Zacks Rank #3 (Hold) stock.

Why Maintained at Neutral?

Volcano Corporation reported dismal fourth-quarter EPS of 4 cents. The result lagged the Zacks Consensus Estimate by 5 cents and missed the year-ago figure of 54 cents as well.  Revenues were up 12% at CER, in line with the Zacks Consensus Estimate. Several challenges including weak domestic PCI market, transition to a direct sales model in Spain, bi-annual price cuts in Japan and pressure on margins which are currently at play forced the company to take a conservative outlook for 2013.

Despite the importance of Japan in development of the IVUS business, the quarter’s performance was disappointing, adversely affected by a 10% cut in reimbursement. In addition, margins remain under pressure due to the duplicity of operations between its new facility and the existing one.

However, we are 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. Volcano continues to believe that the IVUS and FM markets remain under-penetrated.

According to the company, the broader market for intra-body imaging and sensing products will grow from $332 million recorded in 2006 to $2.7 billion by 2021, representing a CAGR of approximately 15%. Within this broader market, the current market for IVUS, FFR and Axsun products will take up $750 million, reflecting high growth potential in the coming period.

Other Stocks to Consider

While we prefer to remain on the sidelines on Volcano Corporation, other medical device stocks worth a look are Cyberonics Inc. (CYBX - Analyst Report), Nuvasive Inc. (NUVA - Snapshot Report) and Cepheid (CPHD - Analyst Report). All the stocks carry a Zacks Rank #1 (Strong Buy).

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