On Jul 23, 2013, we downgraded our long-term recommendation on
) to Neutral following continued revenue shortfalls in Japan and
the setback for the treatment-resistant depression (TRD)
indication. In our opinion, these headwinds dwarf the company's
consistent strong results and avid expectations for fiscal 2014.
The stock carries a Zacks Rank #3 (Hold).
Why the Downgrade?
On Jun 5, Cyberonics reported solid fourth-quarter fiscal 2013
results. Fourth-quarter EPS rose 21.1% to 46 cents, beating the
Zacks Consensus Estimate of 43 cents. Revenues shot up 19% to
$68.3 million, well ahead of the Zacks Consensus Estimate of $64
million. Fiscal 2013 adjusted EPS and revenues of $1.74 and $254
million, respectively, also sailed past the year-ago mark, Zacks
Consensus Estimate as well as the company guidance.
In light of the strong growth trend over the last few quarters,
impressive overseas growth and solid demand for its VNS Therapy
in an underpenetrated epilepsy market, Cyberonics issued an avid
outlook for fiscal 2014. While we derive comfort from the
advantages of VNS therapy and the strong untapped potential of
the epilepsy market, we are wary about competitive pressures from
larger players in the neuromodulation space.
We are also wary about lower-than-expected contributions from the
high focus Japanese market, where Cyberonics continues to witness
a sluggish sales market. Moreover, the ongoing margin pressure
remains an overhang, as gross margin and operating margin posted
downside of 153 basis points (bps) and 130 bps, respectively. To
add to Cyberonics' woes, gross margin is expected to decline 200
bps in fiscal 2014, ruling out any near-term improvement.
Meanwhile, the stand taken by CMS failed to soothe fears
regarding another unsuccessful attempt at gaining national
reimbursement coverage for the depression indication. Cyberonics
also faces pricing pressure due to overall global macroeconomic
Other Stocks to Consider
While we remain on the sidelines for Cyberonics, other stocks
IDEXX Laboratories Inc.
Globus Medical Inc.
) are likely to do well. These stocks carry a Zacks Rank #2
CYBERONICS INC (CYBX): Free Stock Analysis
GLOBUS MEDICAL (GMED): Free Stock Analysis
IDEXX LABS INC (IDXX): Free Stock Analysis
THORATEC CORP (THOR): Free Stock Analysis
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