We are in the second half of fourth-quarter earnings season and as the latest Earnings Preview shows, 53.8% of total S&P 500 members within the Medical sector (one of the 16 broad Zacks sectors within the Zacks Industry classification) already reported their financial numbers. Going by the scorecard so far, total earnings for these sector participants are up 3.5% from the year-ago period on 5.8% rise in revenues.
Overall, earnings from this sector are expected to increase 3.8% on 5.3% higher revenues. Although these projections indicate a sequential decline, the same hints at earnings growth of 6.2% on 7.2% revenue improvement for the quarter to be reported.
Integral to the broader Medical sector, Medical Products companies till last reports came in, fared impressively this earnings season. These industry players encouraged investors with solid earnings figures despite certain quarterly volatilities mirroring the ongoing US-China trade debacle, unfavorable testing volume, pricing pressure and constant regulatory changes. Of the companies that reported, 70.7% beat on earnings while 67.3% surpassed on revenues.
Meanwhile, the Zacks Medical Product sector currently carries a Zacks Sector Rank in the top 28% (72 of 256 industries).
Factors Driving Q4 Release
The past few months have been remarkable for the medical device space in terms of innovation. With AI-powered launches like polyp detector, autonomous AI imaging system for detecting skin cancer, diabetic retinopathy using retinal images, talking algorithm, drugstore chatbots, et al, the medical device domain went from strength to strength. Among other breakthroughs, we should mention the path-breaking heart failure predictor HeartLogic and EMBLEM S-ICD unveiled by Boston Scientific (BSX), both of which drove the company’s fourth-quarter defibrillator sales. Further, Edwards Lifesciences’ (EW - Free Report) newly-introduced INSPIRIS RESILIA tissue valves acted as major growth catalysts in its final quarter of 2019. Moreover, we expect Medtronic’s (MDT - Free Report) Activa Patient Programmer for Deep Brain Stimulation (DBS) therapy to register a strong customer adoption for the to-be-reported quarter, results of which are slated to release on Feb 18.
As expected, wide expansion in the emerging markets strongly contributed to the results until now this reporting cycle. For instance, Stryker’s (SYK - Free Report) core Orthopaedic segment put up a stellar show in the emerging markets during the fourth quarter, boosting international revenues by 7.6%. Additionally, Abbott’s (ABT - Free Report) Established Pharmaceuticals Division saw a robust performance in emerging markets for the same period.
Per Moody’s statement in 2019, sales in the emerging markets are expected to have witnessed a double-digit percentage jump last year, which in turn, might get reflected in the to-be-announced results.
During the fourth quarter, the government introduced its funding bills wherein it talked about a new suspension of the 2.3% Medical Device tax. “We have now also repealed the Obamacare Medical Device Tax, which threatened access to cutting-edge devices that save lives and enhance the quality of life for all Americans.”
This tax was originally enacted in 2013 as part of the Affordable Care Act (ACA). The burden of this 2.3% tax used to fall on the device manufacturers or importers. The suspension offered a relief to medical device manufacturers, enabling them to channelize their funds into R&D. This move as of now positively impacted the fourth-quarter performance of the medical product entities.
Factors to Worry About
Massive Device Suspension a Bane: Sustaining the first three quarters’ trend, the last quarter of 2019 too witnessed mass product recalls by medical device manufacturers. Per a Medical Device and Diagnostic Industry report published in December, “there have been 48 medical device recalls issued in 2019 according to the FDA and the agency reported on four of those recalls just in the past week.” These four suspensions include devices from bigwigs like Medtronic and GE Healthcare. These recalls restricted revenue generation of the respective manufacturers in the fourth quarter.
Trade War Fiasco Persists: The Sino-U.S trade tension triggered a short-term downtrend in the Medical Instruments sector. Despite a series of recent exemptions by the U.S. Trade Representative (USTR) and the introduction of the phase one trade deal, the entire community expects this adversity to reflect on the fourth-quarter results.
In the light of the above discussions, let’s take a look at three Medical Products behemoths that are set to release quarterly results on Feb 13.
DexCom, Inc. (DXCM - Free Report) : Its fourth-quarter top line is likely to reflect a possible expansion in volumes on the back of new patients across all channels and the rising global awareness of the benefits of the company’s real-time Continuous Glucose Monitoring (CGM).
(Read More: DexCom to Report Q4 Earnings: What's in the Cards?)
According to the Zacks model, the right combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat, which is precisely the case here as you will see below. You can see the complete list of today’s Zacks #1 Rank stocks here.
DexCom has a Zacks Rank #2 and an Earnings ESP of +12.27%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Laboratory Corporation of America Holdings (LH - Free Report) or LabCorp: The company’s acquisition of the diagnostic clinical laboratory testing business of South Bend Medical Foundation (SBMF) significantly broadened its diagnostic laboratory arm network. This is likely to have aided the company’s top line in the fourth quarter.
(Read More: What's in the Offing for LabCorp's Earnings in Q4?)
LabCorp has a Zacks Rank #4 (Sell) and an Earnings ESP of -0.60%.
West Pharmaceutical Services, Inc. (WST - Free Report) : Headquartered in Exton, PA, the company is a manufacturer of packaging components and delivery systems for injectable drugs and healthcare products. The company creates products that promote efficiency, reliability and safety of the world's pharmaceutical drug supply.
The Zacks Consensus Estimate for fourth-quarter earnings of 72 cents implies a 1.37% dip from the year-ago reported figure. The consensus estimate for revenues is pegged at $452.2 million, suggesting a 7% ascent from the prior-year reported number.
West Pharmaceutical has a Zacks Rank #3 and an Earnings ESP of 0.00%.
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