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Top 2 MedTech Stocks, Poised to Gain on Earnings this Season - Earnings ESP

Top 2 MedTech Stocks, Poised to Gain on Earnings this Season

Medical device is one of such sectors which are projected to be highly affected by the midterm election results. With the Republicans grabbing the U.S. Senate over the Democrats, this sector is expected to get rid of a number of overhangs. So far, medical device taxes have been a very unpopular part of Obama's Affordable Care Act. Republicans may now revoke this tax, much to the delight of medical devices firms.

The Backdrop

While merger & acquisition (M&A) activities are scaling a seven-year high, Obama's unprecedented entry into the scene, playing against the offshore M&A environment, has created ferment in the medical device equity market worldwide.

Estimating a loss of more than $19.5 billion in a decade, Obama has branded medical device stalwarts' attempts to offset the impact of high U.S. corporate tax rate by shifting their tax base overseas (known as inversion), as an "unpatriotic tax loophole".

Accordingly, in September, the Treasury Department announced its first steps to reduce tax benefits associated with corporate inversions underlining a set of new rules effective immediately. As said by Treasury Secretary Jacob J. Lew, this reform should help eliminate certain techniques which inverted companies currently exploit to gain tax-free access to the deferred earnings of a foreign subsidiary.

Amid such financial turmoil, some healthcare companies are abandoning cross border acquisition deals like AbbVie Inc . ( ABBV ) that had earlier planned to buy Shire plc ( SHPG ). On the other hand, giants like Medtronic Inc. ( MDT ) and Walgreen Co . ( WAG ) are moving ahead with their overseas opportunities. Nevertheless, this tax reform has induced Medtronic to change its financing plan in acquiring its Irish rival Covidien plc ( COV ). The company revealed that it will no longer utilize cash from its foreign subsidiaries, as previously planned, but will instead use an external debt to finance part of Covidien deal.

Walgreen is continuing with the second step of the acquisition of pharmaceutical giant Alliance Boots. However, much in the same league as Medtronic, it has decided to forego its earlier decision of moving their headquarters to Europe. The company's stock price witnessed a sharp decline as the company announced a subsequent reduction in the combined company's 2016 earnings outlook.

Despite the uncertainty currently looming over the medical device space, it might be a good idea to bet on a handful of stocks that are likely to beat earnings estimates this quarter. An earnings beat will naturally translate into rapid price appreciation for these stocks. This, in turn, will promise above-average returns because, as investors, you would be these stocks at a relatively cheaper price owing to the overall negative sentiment presently 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%.

2 Stocks Set to Beat Earnings

Unilife Corporation ( UNIS ) is a leading provider of injectable drug delivery system globally. According to the company, its broad portfolio of proprietary product platforms is highly differentiated from its competitors' products.

The company has seen its shares soar nearly 39% since it signed a worldwide 'Master Services and Commercial Supply Agreement' with Sanofi in Oct 2014. Per the deal, Unilife has been chosen as the sole provider of cartridge based wearable injectors for all of Sanofi's applicable large dose volume drugs, excluding insulins, for a minimum of 15 years. The company's expanded product range has accelerated its position in the fast-growing market for wearable injectors, which is expected to generate $8 billion in sales by 2025.

The stock presently carries a Zacks Rank #3 (Hold) and has an earnings ESP of +17.65%. The Zacks Consensus Estimate for the first quarter of fiscal 2015 is pegged at a loss of 17 cents.

Unilife will be reporting its fiscal first-quarter results on Nov 10.

Derma Sciences Inc. ( DSCI ) is yet another Zacks Rank #3 stock with an earnings ESP of +2.33%. The Zacks Consensus Estimate for the third quarter 2014 is pegged at a loss of 43 cents.

Derma Sciences is a tissue regeneration company focused on pharmaceutical wound care, advanced wound care and traditional wound care products.

The company has delivered positive earnings surprises in three of the trailing four quarters with an average beat of 2.06%.

Derma Sciences currently focuses on the development of DSC127, the company's angiotensin analog pharmaceutical compound with an initial indication for the treatment of diabetic foot ulcers. According to the company, with about 900,000 foot ulcer cases alone in the U.S. (14% to 24% of them require amputation and there is a 45% five-year mortality rate post-amputation), the addressable market is large and rapidly growing. In addition, the company's existing line of novel advanced wound care products has also shown continuing signs of strength.

Derma Science will be reporting its third-quarter 2014 financial results on Nov 10.

The Bottom Line

Apart from measures like mergers and acquisitions to curb the high corporate tax rate, Med Tech sector participants are also undertaking various long-term initiatives like change in business models and cost structures with newer innovations, and restructuring and expansion in emerging markets. They are also trying to divest their non-profitable 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.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

UNILIFE CORP (UNIS): Free Stock Analysis Report

DERMA SCIENCES (DSCI): Free Stock Analysis Report

ABBVIE INC (ABBV): Free Stock Analysis Report

SHIRE PLC-ADR (SHPG): Free Stock Analysis Report

MEDTRONIC (MDT): Free Stock Analysis Report

WALGREEN CO (WAG): Free Stock Analysis Report

COVIDIEN PLC (COV): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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