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On May 9, 2013, we reaffirmed our long-term Neutral recommendation on Cepheid (CPHD - Analyst Report) following strong first-quarter results. While the company continues to record strong quarterly performance, its cautious outlook for 2013 keeps us wondering whether Cepheid’s business model can keep the positive momentum going over the long haul. The molecular diagnostics stock carries a Zacks Rank #3 (Hold).

Why the Reiteration?

On Apr 18, 2013, Cepheid reported adjusted earnings per share (EPS) of 2 cents, an improvement from the Zacks Consensus Estimate of loss of 2 cents per share and loss of 10 cents in the year-ago quarter. This marked the company’s second consecutive quarter of profitable growth.

Revenues surged 19% year over year to $91.9 million in the first quarter, edging past the Zacks Consensus Estimate of $90 million. Growth was led by the Healthcare Acquired Infections (HAI) portfolio, Xpert Flu and Xpert CT/NG and ramp up in system placements under High Burden Developing Country (HBDC) program. However, the company was unable to meet the market demand for Xpert Flu due to inadequate capacity utilization.

On the positive side, Cepheid returned to normal manufacturing operations after addressing the underlying issues, which negatively affected the financial results in the second half of 2012. We believe that the ongoing efforts on capacity expansion should enable the company to meet the market demand for its offerings.

Cepheid’s expectations from its Xpert CT/NG test are sky-high. Despite customer wins from competitors in the quarter, the competitive landscape for its key products remains tough.

The company’s outlook for 2013 is another cause of concern. Revenue forecast of $375–$385 million and EPS estimates of 1–7 cents reflects volatility in the HBDC program revenues due to choppy system placement throughout 2012, contribution from newer products like Xpert CT/NG and prolonged impact of order backlog due to supply disruption in 2012.

Despite several upsides to drive growth, we remain on the sidelines until we see signs of improved execution from Cepheid. Nonetheless, other medical stocks such as Intuitive Surgical Inc. (ISRG - Analyst Report), Heartware International Inc. (HTWR - Snapshot Report) and Natus Medical Inc. (BABY - Snapshot Report) are expected to do well. These stocks carry a Zacks Rank #2 (Buy).

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