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VWR Poised on Solid Fundamentals, Margin Pressure Remains

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On Nov 14, we issued an updated research report on Radnor, PA-based VWR Corporation . This company, carrying a Zacks Rank #3 (Hold), offers laboratory products, services and solutions.

VWR posted a mixed third quarter of 2016, with earnings beating the Zacks Consensus Estimate and revenues missing the mark. However, the company recorded strong sales in Americas as well as the EMEA-APAC region with solid growth in equipment and instrumentation.

Per management, mid-single-digit growth in biopharma, growth in large pharma, biotech, medical devices and sales to CRO customers were accountable for the strength in the top line. Going forward, management expects to witness continued solid business momentum in the Americas segment. Noting several strategic initiatives taken by VWR of late, we believe the Americas segment will retain its strong growth trajectory in the upcoming period. VWR expects to witness continued solid business momentum in the Americas segment in the fourth quarter as well.

In the EMEA-APAC region, revenues grew 1.4% organically in the third quarter, led by higher sales to industrial and healthcare customers. Sales to biopharma customers increased in low-single-digits. Sales to healthcare customers rose in high-single digits owing to strong biotech instrument sales. Industrial revenues improved mid-single digits on strength in petrochemicals and environment, microelectronics, and natural resources. Going forward, management expects its EMEA-APAC segment to continue its historically strong progress.

The company’s stable cash balance position as well as its huge customer base added to the optimism.

On the flip side, VWR continues to face gross margin pressure. Escalating cost of production has been a major factor behind this lackluster outcome. Moreover, as the company offers products from a wide range of suppliers, its ability to sustain its gross margin has been, and will continue to be dependent, partly upon its ability to obtain favorable terms from its suppliers.

Unfavorable currency fluctuation continued to impact the company’s overall sales in the third quarter and management expects no respite from the same in the near term. Intensifying competition is also a headwind for the stock.

Key Picks

Better-ranked medical stocks are Nxstage Medical Inc. , Baxter International Inc. (BAX - Free Report) and Bovie Medical Corporation . Nxstage Medical and Baxter sport a Zacks Rank #1 (Strong Buy), while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Nxstage Medical surged 31.6% over the last one year compared to the S&P 500’s 6.3% over the same period. The company has a four-quarter average positive earnings surprise of 50.00%.

Baxter International rallied 20.9% in the past one year, much higher than the S&P 500’s 4.5%. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 126.5% gain in the past one year, way better than the S&P 500’s 4.5%. The company has a trailing four-quarter average positive earnings surprise of 28.7%.

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