We downgrade our recommendation for
) to 'Underperform', driven by difficult hospital capital equipment
spending environment and management's lowered sales guidance
outlook. Both revenues and earnings for the second quarter missed
the Zacks Consensus Estimate, impacted by a decline in the
company's capital equipment offerings.
CONMED CORP (CNMD): Free Stock Analysis Report
COVIDIEN PLC (COV): Free Stock Analysis Report
SMITH & NEPHEW (SNN): Free Stock Analysis
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Higher sales from Arthroscopy (up 14.7%) and Endoscopic
Technologies divisions (up 6.4%) were partially dampened by weak
Electrosurgery (down 6.5%), Patient Care (down 6%), Powered
Surgical Instruments (down 2.9%) and Endosurgery (down 4.7%) sales.
Utica, New York-based Conmed Corporation is a major medical
products manufacturer, specializing in surgical instruments and
devices. However, the orthopedic industry is currently susceptible
to the economic softness and Conmed is no exception. The shift in
hospital capital spending is bound to act as a drag on the
company's results. Revenues from 20% of Conmed's products, which
fall under the hospital capital equipment budget category, declined
10.7% in the second quarter of 2012.
Following disappointing second quarter results, the company lowered
its full year sales guidance, which might weigh on the stocks'
performance. Revenues are forecast to remain between $765 million
and $775 million (earlier $775 million to $785 million) for 2012.
Further slowdown in Conmed's growth rate, due to internal and
external factors might affect its valuation in the marketplace. In
the end, failure to sustain the growth rate may lead to compression
of Conmed's multiple.
Furthermore, manufacturing difficulties and slower product
adoption, significant competition and pricing pressure remain
additional challenges. Conmed operates in a highly-competitive
orthopedic surgery market against much larger, more
technically-competent companies, such as
Smith & Nephew plc.
However, despite declining capital equipment sales, Conmed is
experiencing healthy growth for its single-use disposable products.
The company derives roughly 80% of its total revenues from
single-use disposable products, which remain the mainstay of its
business. Additionally, it is benefiting from the increasing trend
of using minimally invasive techniques as a large percentage of the
company's products are designed for these procedures.
In addition, Conmed's focus on portfolio expansion is expected to
yield positive results. Its recent pact with Musculoskeletal
Research Foundation (MTF) provides opportunities for incremental
revenues and will be accretive to its earnings this year. Moreover,
the acquisition of Viking Systems is expected to be a material
upside in the future but the integration issue remains a concern.
We believe that the company will continue to face weak capital
purchasing environment in the near term. Our 'Underperform'
recommendation on the stock coincides with our short-term Zacks #4
Rank (Sell rating).