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Bear of the Day: Natus Medical (BABY)

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Natus Medical (BABY - Free Report) is a $1.2 billion provider of healthcare products used for newborns including the screening, treatment, and monitoring of common medical ailments such as hearing impairment, neurological dysfunction, epilepsy, sleep disorders, and other specific neonatal care.

Product offerings include computerized neurodiagnostic systems for audiology, neurology, polysomnography, and neonatology, as well as infant care products such as hearing screening systems, phototherapy devices for the treatment of newborn jaundice, head-cooling products for the treatment of brain injury in newborns, and software systems for managing and tracking disorders and diseases for public health laboratories.

If you've ever known a family who spent time in the neonatal intensive care unit (NICU) of a hospital, chances are they were exposed to these types of products. I have seen first hand how a cooling blanket works to prevent potential brain bleeding and swelling after a baby in our family was put on one for the first 72 hours of her life because of a difficult birth where the physicians were concerned she may have been without oxygen for several minutes.

It is truly amazing that medical research has found a way to lower a newborn's body temperature into a state of hypothermia to prevent brain damage, and to do this procedure safely.

Lack of oxygen to the brain in newborns is called neonatal hypoxic ischemic encephalopathy (HIE) and occurs in approximately 5 out of every 1,000 births. Without immediate treatment, infants are at risk not only of severe brain damage, but death as well. The National InstituteS of Health estimate that 15-20% of newborns who develop HIE will die.

So Why Did BABY Shares Drop 20% Last Week?

On January 8, Natus announced preliminary Q4 results and gave guidance for the coming year. Both sets of numbers disappointed investors and analysts, with 2017 revenues expected to fall in a range of $500.5 million to $501.5 million, versus the Street consensus of approximately $515.5 million.

Here was President and CEO Jim Hawkins commenting on how management expected the company to finish up the year...

"Revenue in the fourth quarter was lower than expected due to weakness in our U.S. Neurodiagnostic business. In addition, due in part to disruption from the integration of computer systems, fourth quarter revenue was also lower than expected at Otometrics. Revenue from our recently acquired neurosurgery business was slightly above our expectations. Newborn Care revenue performed as expected."

For the full year 2018, Natus expects to report revenue of $535 to $540 million and non-GAAP EPS of $1.60 to $1.65. For the first quarter of 2018, management expects to report revenue of $125 to $127 million and non-GAAP EPS of $0.23 to $0.24. The first quarter and full year of 2017 included approximately $10 million in revenue from a non-recurring contract with Venezuela that is not expected to reoccur in 2018.

The Zacks consensus numbers prior to this announcement were Q1 EPS of $0.38 on revenue of $129.7 million and 2018 EPS of $2.11 on revenue of $557.1 million.

These negative estimate revisions are what put BABY in the cellar of the Zacks Rank. Until the estimates stabilize and start heading back up it may be time to step aside from this stock. The Zacks Rank will let you know.

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