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Outperform on ZOLL Medical

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We retain our Outperform recommendation on resuscitation devices maker ZOLL Medical following its forecast-topping first-quarter fiscal 2012 results. Revenues and earnings for the quarter beat the Zacks Consensus Estimates driven by strong sales from the company’s LifeVest and temperature management businesses. ZOLL Medical registered healthy sales across the North American hospital and pre-hospital markets.

Revenues in the North American hospital market jumped 12% year over year in the first quarter. ZOLL Medical witnessed sustained recovery in the North American pre-hospital market with sales surging 25% in the quarter.

The company’s flagship LifeVest business continued its strong growth momentum with revenues soaring 45% in the quarter. Temperature Management business also performed strongly with revenues climbing 28%. However, the company’s AutoPulse (cardiac support pump) business was the weak spot with sales falling 17% in the quarter.

ZOLL Medical is a leading player in the global market for external defibrillators, which is worth more than $1 billion. The company is the innovator of a wide range of product features that have become the standard of care in the external defibrillator industry. ZOLL Medical operates in a highly competitive U.S. defibrillation market and competes with Physio-Control, a wholly owned unit of Medtronic (MDT - Free Report) , and Philips (PHG - Free Report) .

To boost growth, ZOLL Medical is expanding its footprint in the international markets. Moreover, ZOLL Medical remains committed to expanding its product range to sustain growth in the U.S. defibrillation market.

LifeVest remains the cornerstone of ZOLL Medical’s growth story. The device has been already prescribed to over 50,000 patients (at high risk of sudden cardiac arrest) and all the top hospitals in each of the 52 metropolitan areas in the U.S.

The Centers for Medicare and Medicaid Services (CMS), in December 2011, reaffirmed the existing coverage policy for LifeVest for all indications. The announcement removed a major headwind as the CMS, in August 2011, considered changes to the Medicare coverage for wearable cardioverter defibrillators, leading to significant reimbursement risk for LifeVest (given the potential for reimbursement rate cuts).

We are pleased with ZOLL Medical’s solid fundamentals and believe that its wide product range coupled with expansion initiatives should push growth moving forward. Similar to LifeVest, the company’s temperature management business is emerging as a meaningful contributor to its revenues.

Management’s outlook for fiscal 2012 is encouraging with sales expected to grow at a healthy double-digit clip on the strength of the company’s core defibrillator business.

However, we are cautious about the sluggish capital spending environment. Our recommendation on the stock is backed by a Zacks #2 Rank, which translates into a short-term Buy rating.

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