Reiterating ZOLL at Neutral

We maintain our Neutral recommendation on resuscitation devices maker ZOLL Medical (ZOLL). Revenues and earnings for second-quarter fiscal 2011 beat the Zacks Consensus Estimates driven by strong contributions from the Massachusetts-based company’s LifeVest and temperature management businesses, backed by healthy international growth.

Revenues from ZOLL Medical’s North American hospital market clipped 2% year over year, as sales from its U.S. military business tumbled 17.5% in the quarter. The company’s North American pre-hospital market remains affected by a still weak capital spending backdrop with sales dipping 4% in the second quarter.

ZOLL Medical’s flagship LifeVest business continues its strong momentum with revenues propelling 60% in the quarter. However, sales from its AutoPulse cardiac support pump tanked 34%, hit by tight budgets for equipment purchases in the emergency medical services (“EMS”) channel.

ZOLL Medical is a leading player in the global market for external defibrillators, which is worth more than $1 billion. The company is the innovator of a wide range of products that have become the standard of care in the external defibrillator industry.

ZOLL Medical’s overseas business remains on a healthy growth track with sales climbing 25% in the second quarter. To boost growth, ZOLL Medical is expanding its footprint in the international markets.

Moreover, ZOLL Medical remains committed to expanding its product range to sustain growth in the U.S. defibrillation market. The company’s new Propaq MD defibrillator and the Propaq M heart monitor represent a major boost for its military-focused business. These devices were recently cleared in Canada.

The company recently began shipping a new version of its AED Plus devices that are fully compliant with the new American Heart Association (“AHA”) and European Resuscitation Council (“ERC”) guidelines. We believe that ZOLL Medical’s wide product range coupled with its expansion initiatives should push growth moving forward.

Similar to LifeVest, the company’s temperature management business is expected to emerge as a meaningful contributor to sales and margins in due course. Revenues from this business surged 52% in the most recent quarter.

However, ZOLL Medical operates in a highly competitive U.S. defibrillation market. It competes with Physio-Control, a wholly-owned unit of Medtronic (MDT) and Philips (PHG). Moreover, the North American EMS market remains sluggish due to budget constraints with lack of visibility for material improvement in the near-term. Our recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold).

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