We upgrade our recommendation for Conmed Corporation (CNMD) to Neutral following its better-than-expected results in the last quarter and our improved visibility on the stock based on the rebound across end-user markers. Second-quarter fiscal 2010 revenues and earnings beat the Zacks Consensus Estimate. Profit skyrocketed year over year (a five-fold growth), boosted by forecast-beating top-line growth and cost synergies from the company’s ongoing restructuring initiatives.
Healthy contributions from major business segments such as Arthroscopy, Powered Surgical and Electrosurgery fueled double-digit revenue growth. Gross margin improved year over year as Conmed spent less on its new manufacturing facility in Chihuahua, Mexico. The company reaffirmed its revenues and adjusted earnings guidance for fiscal 2010.
Conmed is a major medical products manufacturer specializing in surgical instruments and devices. Moving forward, the company is poised to benefit from the uptrend in the adoption of minimally invasive techniques as a large percentage of its products are designed for these procedures, representing an attractive opportunity to sustain revenue growth.
Conmed derives roughly 75% of its total revenues from single-use disposable products, which remains the mainstay of its business. Hospitals and clinics are expanding the use of these products, which reduce overheads from sterilizing surgical instruments and products following surgery. The company’s sales from single-use disposable products continue to grow at a high-single digit rate. Moreover, Conmed’s Arthroscopy business is growing at a healthy pace, driven by new product launches and procedural volume growth.
However, Conmed operates in a highly-competitive orthopedic surgery market against much larger, more technically-competent companies, such as Johnson & Johnson (JNJ), Smith & Nephew (SNN) and Stryker Corporation (SYK).
Moreover, the orthopedic industry faces severe pricing pressure and Conmed is no exception. Conmed is also susceptible to foreign exchange headwinds, which may impact its top line for the remainder of fiscal 2010.