CHICAGO, July 30, 2014 /PRNewswire/ -- Zacks.com announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include the Johnson & Johnson (NYSE:JNJ-Free Report), Medtronic, Inc. (NYSE:MDT-Free Report), Wright Medical Group Inc. (Nasdaq:WMGI-Free Report), Cardinal Health, Inc. (NYSE:CAH-Free Report) and WellPoint Inc. (NYSE:WLP-Free Report).
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
Here are highlights from Tuesday's Analyst Blog:
Top 3 MedTechs Poised to Gain on Earnings
Over the past few years, the worldwide medical device market has been witnessing considerable upheaval owing to a confluence of factors. The investment climate for the medical device majors has also become increasingly vigilant due to the global economic downturn resulting in growing regulatory and budgetary pressures, cost escalation and resource constrictions.
The highly regulated U.S. medical device industry is constrained by stringent and complex procedures, leading to approval delays. This sometimes demotivates companies, deterring them from investing in product development. According to a report based on a survey of over 200 medical technology companies (FDA Impact on U.S. Medical Technology Innovation), the U.S. Food and Drug Administration (FDA) takes a significantly longer time to review compared to its European counterpart.
These simultaneous encounters, as referred to by EY in their recent medical technology report, "a perfect storm" is forcing the stalwarts to shift their business model toward a value-based health care structure with strategies to expand their product offerings, investment in emerging geographies and untapped market expansion.
To weather the squall, medical device companies are coming up with efficient capital allocation in order to grasp any new opportunity related to their business model innovation. In this regard, they are working on reducing fixed costs, conducting research and development in a prudent way and strategic value extraction from intellectual property.
As per Susan Morano, worldwide Vice President for New Business Development, Medical Devices and Diagnostics Group, Johnson & Johnson (NYSE:JNJ-Free Report), in order to seek growth avenues in this challenging scenario, medical device companies should develop global and emerging market experience, and also focus on stakeholders apart from the physicians alone. Above all, they should have a proper understanding of health economics, government requirements and market segmentation.
Omar Ishrak, the Chairman and CEO of Medtronic, Inc. (NYSE:MDT-Free Report) depicted that the U.S. health care system is gradually moving toward a fee-for-value approach, which prioritizes value over volume and outcomes over inputs. According to him, while the industry is facing increased pricing pressure leading to slower market growth, the companies should deliver new innovation and value propositions that meet the present clinical and economic demands. However, this is challenging as innovation within the medical devices industry is limited to technology alone. Accordingly, he suggests the need to focus on opportunities to redefine innovations across the industry, in a bid to include new business models that deliver clear clinical and economic value to health care systems.
Despite the overall vague sentiment, it might be a good idea to bet on a handful of medical device stocks that are likely to beat earnings estimates this quarter. An earnings beat will translate into rapid price appreciation for these stocks. This will promise above-average returns because, as investors, you are getting these stocks at a cheaper price due to the overall negative sentiment prevailing in the sector.
How to Choose the Best of the Lot?
Betting on stocks that are expected to beat earnings in their upcoming release is a profitable strategy, as earnings beat generally translates into stock price appreciation.
With the existence of a number of industry players, finding the right stocks that have the potential to beat earnings estimates could pose a difficult task. Our proprietary methodology, however, makes it fairly simple for you. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) – and a positive Earnings ESP.
Earnings ESP is our proprietary methodology for determining which stocks have the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
3 Stocks Set to Beat Earnings
Here are three medical stocks that have the right combination of elements to post an earnings beat this quarter:
Wright Medical Group Inc. (Nasdaq:WMGI-Free Report) is a global orthopedic device company specializing in the design, manufacture, and marketing of reconstructive joint devices and bio-orthopedic material. The company typically focuses on higher-growth sectors of the orthopedics industry such as ankle, foot and upper extremity products, as well as the integration of biologic products into reconstructive procedures. In recent years, Wright Medical has expended significant resources in growing its extremities and biologics businesses globally.
The stock carries a Zacks Rank #1 and has an Earnings ESP of +8.89%. The Zacks Consensus Estimate for the second quarter is pegged at a loss of 45 cents.
Notably, Wright Medical has delivered positive earnings surprises in three of the last four quarters with an average beat of 2.65%. Down the line, Wright Medical's revenue growth will be supported by the launch of new products, including internally developed ones and those from acquisitions. Over the past several quarters, the company has demonstrated consistent growth via both organic and inorganic means.
Wright Medical will be reporting second-quarter 2014 earnings on Aug 5.
Cardinal Health, Inc. (NYSE:CAH-Free Report), based in Dublin, OH, is a Zacks Rank #3 stock with an Earnings ESP of +1.24%. The Zacks Consensus Estimate for the fiscal fourth quarter is pegged at a loss of 81 cents.
Cardinal Health is a nation-wide drug distributor and provider of services to pharmacies, healthcare providers and manufacturers. As one of the largest global health care companies, Cardinal Health is an important link in the health care supply chain.
The company has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 0.24%.
The company's diversified product portfolio is a hedge against the risk of sales shortfall in testing times. In addition, its generics business has shown continuing signs of strength surpassing the market growth rate.
Cardinal Health will be reporting its fiscal fourth-quarter 2014 earnings on Aug 4.
Based in Indianapolis, IN, WellPoint is one of the largest publicly traded managed care organizations in terms of membership. The company has delivered positive earnings surprises in all the trailing four quarters with an average beat of 12.35%.
WellPoint has been witnessing substantial earnings growth over the past few quarters, spurred by improvements in operating cost structure, strategic acquisitions and efficient capital management. Further, WellPoint's key strength lies in its independent license for marketing products under BCBSA – the most recognized brand in the industry. This enhances the possibility of earnings growth further. Moreover, inorganic growth strategies, commercial ASO marketplace expansion and wide product portfolio should drive long-term growth.
WellPoint will be reporting second-quarter 2014 earnings on Jul 30.
The Bottom Line
TheMedTech sector participants are undertaking various restructuring initiatives, which could result in continued mergers and acquisitions (M&A) and expansion to emerging markets, going forward. They are also trying to divest their nonpaying operations in order to weather the tax burden. Nevertheless, for the time being, you can safely rely on the industry outperformers that still possess significant earnings strength.
Today, Zacks is promoting its ''Buy'' stock recommendations. Get #1Stock of the Day pick for free.
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