The first-quarter reporting cycle is in full swing. Apparently, the MedTech companies (Zacks-defined Medical Products stocks) within the broader Medical sector have witnessed a marginal increase in earnings year over year.
The sector players that have released their earnings so far showed market share gain within their base businesses through the months of the first quarter compared with the same period in 2023.
However, ongoing macroeconomic headwinds in the form of supply chain disruption and labor shortages put pressure on the bottom line.
Even if we consider the performance on a sequential basis, the first-quarter earnings of the majority of the companies are likely to have declined. Replicating the market-wide trend, this sector’s first-quarter results are likely to have been significantly dampened by the ongoing geopolitical tension and other macroeconomic threats globally.
Here, we talk about three stocks — 10x Genomics TXG, Cardinal Health Inc. CAH and Hologic HOLX — that are expected to beat earnings estimates in the ongoing reporting cycle.
Trends This Reporting Cycle
The first-quarter reporting cycle has so far depicted a year-over-year improvement in legacy-based business sales volumes. There has been continued market share gain for the elective legacy businesses of Medical Products companies, with particular expansion happening in Wearable Tech, Women’s Health and Precision Medicine spaces. However, at the same time, the aggregate results of the sector have been significantly marred by the year-over-year decline in testing demand of the diagnostic testing companies compared to the year-ago period’s COVID-based rush in testing levels.
Further, geopolitical instability stemming from the continued conflict between Russia and Ukraine, as well as between the United States and China, has led to severe disruption in the supply chain globally. In terms of raw material and labor costs as well as freight charges, first-quarter results are so far disappointing in comparison to the year-ago period.
Per IMF’s January 2024 World Economic Outlook Update, economic growth is projected to be 3.1% in 2024 and 3.2% in 2025, which are still below the historical (2000–19) average of 3.8%. This is primarily because of elevated central bank policy rates to fight inflation, a withdrawal of fiscal support amid high debt weighing on economic activity and low underlying productivity growth.
The policymakers are also concerned about the new commodity price spikes from geopolitical shocks, including continued attacks in the Red Sea. Further, according to them, supply disruptions or more persistent underlying inflation could prolong tight monetary conditions. Other major factors denting growth within the medical instruments space are worsening property sector woes in China or, elsewhere, a disruptive turn to tax hikes and spending cuts.
This is expected to be prominently reflected in the first-quarter consolidated results of the Medical Products companies in the form of logistical challenges and higher unit costs, resulting in corporate profitability cuts.
Scorecard and Expectations
Per the latest Earnings Preview, quarterly results so far have been sluggish year over year. Going by the sector’s scorecard, 16.7% of the companies in the Medical sector, constituting 32.6% of the sector’s market capitalization, reported earnings till Apr 24. Of these, 70% beat both earnings and revenue estimates. However, earnings improved a mere 0.7% year over year on 3.6% higher revenues.
Overall, first-quarter earnings of the Medical sector are expected to plunge 7.6% despite 6.3% revenue growth. This compares with the fourth-quarter earnings decline of 17% on revenue growth of 7%.
Key Releases
Boston Scientific Corporation BSX is one of the MedTech companies whose base-business performance registered a strong market share gain. In the first quarter, the company registered a strong year-over-year improvement in organic sales, indicating a solid rebound in the legacy businesses across all geographic regions despite all macroeconomic odds.However, rising costs put pressure on the company’s gross margin.
LabCorp’s LH 2.3% increase in organic revenues was driven by a 4.2% rise in the company's organic Base Business, partially offset by a 1.9% decline in PCR testing (COVID-19 Testing). Meanwhile, the company’s adjusted operating income declined 1% year over year in the first quarter. The adjusted operating margin contracted 69 bps from the year-ago quarter’s levels to 12.2%.
Zacks Methodology
Given the high degree of diversity in the MedTech industry, finding the right stocks with the potential to beat estimates might be quite a daunting task.
However, our proprietary Zacks methodology makes the task fairly simple.
We are focusing on stocks that have the combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
Our research shows that for stocks with this combination, the chances of an earnings surprise are as high as 70%.
Earnings ESP provides the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Our Picks
Here, we present three MedTech stocks that are expected to beat earnings estimates in this reporting cycle.
Despite an uncertain macro environment,10x Genomics is expected to have gained market share in the life science solutions space, banking on the strong performance of its integrated solutions, including instruments, consumables and software for single-cell and spatial biology. The company’s several new launches in the first quarter, including the launch of GEM-X, the next generation of the company's leading single cell technology, a new Xenium gene panel optimized for immuno-oncology applications as well as the launch of its Visium HD Spatial Gene Expression product are expected to have contributed to the top line in the first quarter.
10x Genomics’ Earnings ESP of +35.15% and a Zacks Rank #2 raise the possibility of an earnings surprise in the to-be-reported quarter.
10x Genomics is slated to release results for the first quarter of 2024 on Apr 30.
10x Genomics Price and EPS Surprise
10x Genomics price-eps-surprise | 10x Genomics Quote
Cardinal Health, in the first quarter, might have continued to gain from strong performances across its businesses in pharmaceutical distribution, manufacturer and specialty services, and nuclear and pharmacy services. Strong branded pharmaceutical sales growth is expected from large customers. Management earlier anticipated recovery in generic volumes to continue. Further, continued robust demand for GLP-1 medications is expected to have acted as a major tailwind for the company’s first-quarter performance.
Cardinal Health is scheduled to release third-quarter fiscal 2024 results on May 2.
Cardinal Health has an Earnings ESP of +1.11% and a Zacks Rank #3.
Cardinal Health, Inc. Price and EPS Surprise
Cardinal Health, Inc. price-eps-surprise | Cardinal Health, Inc. Quote
Hologic is expected to have witnessed growth in the Diagnostics business (excluding COVID) from the growing adoption of Panther instruments and an expanded Panther installed base in the second quarter of fiscal 2024. The company’s expanded global installed base of Panthers represents the catalyst for the division's sustained growth. Within the Breast Health segment, the company is expected to have registered growth in the fiscal second quarter, driven by robust demand for the company’s gantries. In the gantry business, Hologic continues to benefit from a strong cadence of orders. We expect this trend to have continued through the fiscal second quarter as well, thus adding to the top line.
Hologic is scheduled to release second-quarter fiscal 2024 results on May 2.
Hologic has an Earnings ESP of +0.34% and a Zacks Rank #3.
Hologic, Inc. Price and EPS Surprise
Hologic, Inc. price-eps-surprise | Hologic, Inc. Quote
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