Medical Device Stocks Worth Monitoring This Year The bulls are charging Wall Street. The Dow Jone

Medical Device Stocks Worth Monitoring This Year

The bulls are charging Wall Street. The Dow Jones Industrial Average is up 4 percent this year, as is the Standard & Poor 500 Index. The Nasdaq index is up 3.7 percent, and the CBOE Volatility Index is down. Investor confidence also is on the rise, despite unrest in Libya, a nuclear/natural catastrophe in Japan, debt troubles in Europe and mixed economic news in the United States.

“The U.S. economy is back,” analysts proudly have proclaimed.

It certainly appears that way. Double-dip recession fears are now just a distant

memory, venture capitalists slowly arereacquainting themselves with potentially risky investments and a falling dollar has made U.S.-produced goods more attractive on the global marketplace. Exports throughNovember 2010 grew 17 percent compared with 2009, and U.S. commerce officials say that expansion helped bolster the nation’s gross domestic product growth last year by 2 to 3 percent. All those exports were good for business, too—more exports means more dollars for American companies.

Indeed, U.S. business coffers seemed more full in the final quarter of 2010 and the first quarter of 2011. A breakdown of first-quarter financial reports by Wall Street analysts show that 80 percent of the companies listed in the Standard & Poor’s 500 Index reported higher-than-expected earnings. In many cases, the disparity was significant: Firms did not merely beat Wall Street projections—they left those expectations in the dust.

Such stellar performances transcended industries, too. Truck engine manufacturer Cummins Inc. reported earnings of 31 cents per share, or 22 percent, above Wall Street estimates. Apple Inc., the world’s most famous computer company, soared past analysts’ projections by $1.03 per share, or 19 percent, while The Timken Company, an Ohio-based ball bearings maker, topped Wall Street projections by 31 percent.

Medical device firms, which experienced flat sales during the financial crisis, were not immune to the earnings bonanza in the two most recent quarters. Mindray Medical International Ltd. reported double-digit gains in net revenue in the fourth quarter of 2010, and NuVasive Inc. did the same in the first quarter of 2011, ended March 31. Abbott Laboratories followed suit as well, posting double-digit gains across its various business sectors, with Emerging Markets and Durable Growth Business showing the most significant increases (38.4 percent and 24.3 percent respectively).

Such robust growth was a welcome surprise in the orthopedic industry, where manufacturers still are struggling to recover from a torrent of troubles that have impacted sales over the last two years—namely, product recalls, controversial studies on the efficacy of implants, and a reduction in the overall number of elective surgeries performed. Exactech Inc., a Gainesville, Fla.-based maker of bone and joint restoration products, experienced a 33 percent jump in extremity implant revenue and a 21 percent rise in hip implant revenue during the first quarter of 2011. Stryker Corp. and Zimmer Holdings Inc. each reported sales increases, with Stryker’s sales jumping 12 percent andZimmer’s inching up 5 percent.

Though analysts disagree whether the market can maintain such a string of top-notch performances for the rest of the year, they concur that a less frenetic pace of growth ultimately will benefit stocks. As more money flows into the medical device sector, Wall Street investors are expecting stock prices to rise. The following companies are among many worth watching this year for significant gains in stock value:

Align Technology Inc.: The closing stock price of this San Jose, Calif.-based designer and manufacturer of the Invisalign (invisible teeth-straightening) system has steadily risen over the last month, going from $20.70 on April 1 to $24.35 on May 3. The day after the company released first-quarter (2011) earnings figures (April 21), Align’s stock jumped to $24.99, and for good reason—net revenue increased 16.4 percent to $104.9 million, net profit climbed 6 percent to $15.8 million and the firm shipped a record 71,400 cases of its product. “The strength we saw in the business toward the end of 2010 continued throughout the first quarter of 2011, particularly for North American orthodontists,” President and CEO Thomas M. Prescott said when the company’s first-quarter earnings were announced. “This positive trend reflects increased patient traffic in our customers’ offices, along with renewed interest in high-value procedures like Invisalign…” That increased patient traffic and renewed interest in Align’s signature product—which has a virtual monopoly on the invisible braces market—could push the company’s stock prices even higher, possibly to the high $20s, in the next several months.

Accuray Inc.: In the weeks following its FY 2011 second quarter earnings report, Accuray’s stock shot up 50 percent, topping out at $11.16 on Feb. 17. That peak represented a 60 percent increase compared with the stock’s closing price of $6.96 on the first day of trading this year. The uptick likely was driven by a solid order backlog for the company’s CyberKnife product, an image-guided robotic radiosurgery system that treats tumors anywhere in the body, including the spine, lung, prostate, liver and pancreas. In the company’s second quarter, ended Dec. 31, 2010, backlogged orders totaled $170 million, up 12 percent compared with the first quarter and 27 percent compared with the second quarter of fiscal 2010. Accuray also reported increases in its service backlog ($240 million) and total backlog ($410 million). Since hitting its 52-week high, Accuray’s stock price has slipped back into the single digits, ranging between $9 (in early March when it purchased a competitor, TomoTherapy Inc. for $227 million in cash and stocks), to $9.49 on April 8. When the company released its FY 2011 third quarter earnings on May 5, its stock closed at $8.90, but with another increase in backlogged orders, history may very well repeat itself. During the third quarter, Accuray received 13 orders for the CyberKnife system, and orders to backlog totaled $58.5 million in the three months ended March 31—$43.2 million for systems and $15.3 million for service. System backlog totaled $158.5 million at the end of the third quarter, comparable to the previous quarter and a 27 percent increase compared with the same quarter in fiscal 2010. Service backlog totaled $243.5 million at the end of the third quarter, comparable to the previous quarter and an 18 percent increase compared with Q3 of fiscal 2010. Total backlog was $413.4 million at the end of Q3, comparable and up 18 percent, respectively, compared with the second quarter and Q3 of fiscal 2010.

Caliper Life Sciences: Analysts like what they see in Caliper’s next-generation sequencing technology and the company’s ramp toward sustainable profitability (the Hopkinton, Mass.-based firm provides technologies that enable researchers to develop life-saving and diagnostic tests more quickly and efficiently). There’s even more to like in the company’s latest earnings report, which showed double-digit increases in the firm’s three core business areas in the first quarter of 2011. Revenue in Caliper’s Imaging business unit grew 44 percent; more than half of that growth (25 percent) came from existing pre-clinical in vivo molecular imaging product lines and 19 percent was derived from acquisition-driven growth from tissue analysis products. Revenue in the Discovery Research Unit climbed 22 percent, while Caliper Discovery Alliances and Services soared 93 percent, driven mostly by revenues from the division’s contract with the U.S. Environmental Protection Agency under the ToxCast screening program. Analysts expect growth in these units to continue throughout the year, which could lead to additional price-earnings ratio in its stock.

The Cooper Companies Inc.: The Pleasanton, Calif.-based manufacturer of vision care and women’s healthcare products posted some pretty impressive numbers in the first quarter of fiscal 2011 (ended Jan. 31), reporting a 13 percent rise in revenue and non-GAAP earnings per share of 85 cents, well above the 67 cents that Wall Street analysts had expected. Net income more than doubled, going from $20.4 million in the first quarter of fiscal 2010 to $45.2 million in Q1 of 2011. Analysts with The Tipping Point, a weekly long/short market newsletter, believe the Cooper Companies potentially can reach $5 in earnings power when its next fiscal year ends in October 2012.

Dynatronics Corporation: This company’s stock is relatively cheap (it closed at $1.60 on May 5) considering the firm secured three significant contracts with Group Purchasing Organizations earlier this year. The higher gross margins attached to these contracts could significantly boost the physical therapy equipment maker’s profits over the next two fiscal years. Analysts believe that each $5 million sales increase could push earnings per share up by 7 cents. As a result, its stock price could go as high as $5.

Intuitive Surgical Inc.: Despite a solid financial performance in the first quarter of 2011 (ended March 31), executives declined to raise the Sunnyvale, Calif.-based firm’s earnings forecast for the year, choosing instead to stick with their 16 percent to 20 percent growth range. But analysts believe the creator of the da Vinci Surgical System (a robotic device for minimally invasive surgery) potentially can exceed 20 percent earnings growth quite easily this year, particularly if the company applies its robotic technology to the cardiac surgery market as some investors are speculating. Such a move would give the company $1.5 billion worth of opportunity, a windfall that surely would move Intuitive’s stock price significantly higher in the future.

Synovis Life Technologies Inc.: President and CEO Richard Kramp certainly seemed bullish on the prospects for his company this year when he discussed Synovis’ fiscal 2011 first-quarter earnings in February: “Synovis is off to a strong start in fiscal 2011, with record quarterly revenue in multiple product lines. In each area of focus, our products are gaining acceptance among physicians for their features and performance. Our sales teams and distribution networks are expanding our customer base, developing solid relationships and becoming increasingly effective in target markets.” With such an upbeat speech, analysts are puzzled by the biological and mechanical product maker’s relatively conservative growth forecast for the current fiscal year—a 15 percent rise in revenue and operating margins in the low- to mid-teens and gross margins just slightly ahead of fiscal 2010 levels. Analysts predict a $1.10- $1.20 per share boost in earnings power for Synovis in the next fiscal year; a possible 25 price-earnings ratio would yield a stock valued at about $30 per share in the next 12 months.

Zoll Medical Corporation: The provider of defibrillation and monitoring products has had four consecutive quarters of stellar growth. Its most recent quarterly earnings report showed a 14 percent rise in revenue to $122.5 million, a 65 percent spike in net income to $6 million, and a 59 percent increase in diluted earnings per share to 0.27 cents. Backlog in the second quarter of fiscal 2011 totaled $29 million, a whopping 123 percent increase compared with the $13 million reported in Q1 of fiscal 2011 and a 31.8 percent increase compared with the $22 million backlog at the end of Q2 in fiscal 2010. An expected 14.5 percent increase in sales over the next two fiscal years should inflate Zoll’s earnings by 37 percent in 2011 and 41 percent in 2012, analysts predict. If the company exceeds the 14.5 percent growth rate, the stock could climb toward $60 by the end of fiscal 2011.