Kinetic Initiated at Neutral

Recently, we initiated our coverage on Kinetic Concepts, Inc. (KCI) with a Neutral rating.

Kinetic reported an adjusted EPS of $1.01, beating the Zacks Consensus Estimate of $0.97 and the year-ago quarter’s $0.98.

Net sales (including rental income) of the company increased 1.3% to $497.8 million with a 3.1% decline in rental income to $283.1 million. A 2.7% revenue growth of the North American market was offset by a 3.5% decline of the EMEA/APAC market due to unfavorable currency movements.

The company lowered its revenues and EPS guidance due to continued weakness in its Therapeutic Support Systems’ (TSS) rental business, delay in the launch of new Active Healing Solutions (AHS) products and concerns related to currency movements.

In the reported quarter, Kinetic witnessed stabilization in the US V.A.C. business (within the AHS segment) due to increased orders from the hospital market, despite several macroeconomic challenges. Volume in the hospital setting declined as fewer chronic wounds were treated and providers shifted to lower priced advanced wound care therapies. Moreover, prices were also under pressure.

In order to strengthen its post acute business, Kinetic is expanding its sales force and clinical professionals in the US by the end of 2010. Moreover, the company penetrated the Japanese market with the launch of V.A.C. ATS system expects to generate revenues of $5− $10 million in Japan by the end of fiscal 2010.

Significant advancement in Kinetic’s globalization efforts was witnessed in the reported quarter. In the AHS business, Kinetic entered the large and under-penetrated Japanese market with its core Negative Pressure Wound Therapy (NPWT) product and related disposables. The company has begun looking to launch NPWT products in other countries including Brazil, Russia, India and China.

Moreover, Kinetic is working towards reducing its cost structure. In this direction, it has taken various steps to improve the manufacturing operations through improved sourcing and automation as well as global consolidation of certain shared services.

We believe that Kinetic should be able to generate higher revenues in the forthcoming period given a host of new products and applications, which include next generation V.A.C. with related dressings as well as the company’s recent agreements with Novadaq and Novation. However, we are apprehensive about the patent litigation with Smith & Nephew plc (SNN), challenging economic environment and competitive landscape.

KINETIC CONCPTS (KCI): Free Stock Analysis Report

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