The healthcare industry has garnered enviable investor attention since the onset of the COVID-19 pandemic. And because new variants of the virus are still being identified, the healthcare sector should remain in the limelight. In addition, President Biden’s “Build Back Better” plan has provisions to boost the healthcare industry. The medical devices market is evolving rapidly with significant technological advancements and artificial intelligence (AI) integration and analysts expect the global medical devices market to grow at a 6.3% CAGR by 2027 to hit $625.30 billion.
Against this backdrop, the shares of medical devices maker ReWalk Robotics Ltd. (RWLK) are rallying on a Breakthrough Device Designation from the Food and Drug Administration for one of its devices. However, the company does not possess sufficient fundamental strength to justify the rally. RWLK’s revenue decreased 13.9% year-over-year to $1.44 million in its fiscal second quarter, ended June 30, while its non-GAAP net loss increased 7.7% from the same period last year to $2.87 million. Moreover, RWLK is trading at a stretched valuation. Its 16.48 forward Price/Sales multiple is currently trading 105.1% above the 8.03 industry average.
So we think small-cap medical equipment stocks Cardiovascular Systems, Inc. (CSII), Varex Imaging Corporation (VREX), and Utah Medical Products, Inc. (UTMD) are better positioned to capitalize on the industry tailwinds.
Cardiovascular Systems, Inc. (CSII)
CSII in St. Paul, Minn., operates as a medical device company that develops and commercializes solutions for treating peripheral and coronary artery diseases. The company’s offerings include peripheral artery disease products, catheters, pharmacological treatment alternatives, and peripheral support products. It has a market capitalization of $1.44 billion.
On November 4, CSII announced that enrollment of the first-in-human trial of its everolimus drug-coated balloon (DCB) had begun. The drug, which is being developed by leveraging Chansu Vascular Technologies, LLC’s expertise, has already treated one patient. Commercialization of the DCB may help the company cater to patients with cardiovascular lesions and prove profitable.
In September, the company reported that its ViperCross peripheral support catheter had treated one patient. This should be a significant addition to the company’s product portfolio. “With the commercial launch of ViperCross, CSI now offers a complete portfolio of products for the treatment of peripheral artery disease,” said Scott R. Ward, Chairman, President, and Chief Executive Officer of CSI.
For its fourth fiscal quarter, ended June 30, CSII’s net revenues increased 66.8% year-over-year to $70.99 million. Its gross profit rose 55.4% from its prior-year quarter to $50.35 million. Its adjusted EBITDA for its fiscal year ended June 30 stood at $11.96 million, up substantially from its negative year-ago value.
A $0.04 consensus EPS estimate for the next year (fiscal 2023) indicates a 122.2% year-over-year increase. Likewise, the $336.49 million consensus revenue estimate for the coming year reflects a 13.9% improvement from the current year. Furthermore, CSII has an impressive surprise earnings history; it has topped consensus EPS estimates for three of the trailing four quarters.
The stock has gained 1.1% in price over the past year and 6.9% over the past month to close Friday’s trading session at $35.48.
CSII’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall B rating, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree.
CSII has a Quality grade of B. In the 172-stock Medical – Devices & Equipment industry, it is ranked #48.
Click here to see the additional POWR Ratings for CSII (Growth, Value, Momentum, Stability, and Sentiment).
Varex Imaging Corporation (VREX)
VREX designs and manufactures X-ray imaging components and operates through the segments of Medical and Industrial. The Salt Lake City, Utah, company sells its portfolio directly to end-users, original equipment manufacturers, and independent service companies. It has a market capitalization of $1.12 billion.
In July, the company added a digital radiography detector to its product line. The equipment, which is robust, reliable, and has wireless charging, should add to VREX’s revenue stream by increasing durability and convenience for end-use customers.
Also in July, VREX declared the partial redemption of $30 million of its $300 million 7.875% senior secured notes due 2027. The move reflects the company’s improving financial performance and will reduce its interest expenses.
VREX’s total revenues increased 23.4% year-over-year to $211.20 million in its third fiscal quarter, ended July 2. Its non-GAAP gross profit improved 68.8% from the same period last year to $76.30 million. Its non-GAAP net income and non-GAAP net income per share came in at $16.10 million and $0.40, respectively, registering substantial increases from their negative year-ago values.
Analysts expect EPS to increase 1,412.5% year-over-year to $1.21 for the current year (fiscal 2021). Likewise, the Street’s $807.30 million revenue estimate for the current year indicates a 9.3% rise from the prior year. In addition, VREX has topped consensus EPS estimates in each of the trailing four quarters.
VREX’s stock has gained 100.9% in price over the past year to close Friday’s trading session at $28.41. It has gained 70.3% year-to-date.
It is no surprise that VREX has an overall B rating, which translates to Buy in our POWR Rating system. The stock has an A grade for Growth, and a B grade for Value and Stability. It is ranked #32 in the Medical – Devices & Equipment industry.
To see the additional POWR Ratings for Momentum, Sentiment, and Quality for VREX, click here.
Utah Medical Products, Inc. (UTMD)
UTMD manufactures and distributes medical devices for the healthcare industry. It offers a portfolio of products that include fetal monitoring accessories, vacuum-assisted delivery systems, and other labor and delivery tools. The Midvale, Utah, company has a $380.04 million market capitalization.
On November 2, UTMD’s board of directors declared a special dividend of $2.00, replacing the company’s normal quarterly dividend and payable to shareholders on December 29. The special dividend is indicative of the company’s strong cash position and aligns with its long-term objective of maximizing returns for stockholders.
For its third fiscal quarter, ended September 30, UTMD’s net sales climbed 20% year-over-year to $12.57 million. Its operating income improved 42.1% from the prior-year quarter to $5.10 million. And its net income and EPS increased 43.4% and $43.2%, respectively, from the same period last year to $4.21 million and $1.15.
The stock has gained 28.2% in price over the past year and 23.5% year-to-date to close Friday’s trading session at $104.15.
UTMD’s POWR Ratings reflect this promising outlook. The stock has an overall A rating which equates to Strong Buy in our proprietary rating system. The stock also has a Quality grade of A, and a Value, Stability, and Sentiment grade of B. It is ranked #3 in the Medical – Devices & Equipment industry.
In addition to the POWR Rating grades we have stated above, one can see UTMD ratings for Growth and Momentum here.
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CSII shares were trading at $34.81 per share on Monday afternoon, down $0.67 (-1.89%). Year-to-date, CSII has declined -20.45%, versus a 26.74% rise in the benchmark S&P 500 index during the same period.
About the Author: Anushka Dutta
Anushka is an analyst whose interest in understanding the impact of broader economic changes on financial markets motivated her to pursue a career in investment research. More...
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