On Jun 17, 2014, Zacks Investment Research upgraded Onmicell, Inc. (OMCL) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
Over the past 60 days, Omnicell has been witnessing declining earnings estimate revisions for 2014 and 2015 with no positive movement. The negative revisions led to an 8.1% and a 12.5% fall in the Zacks Consensus Estimate to 99 cents per share in 2014 and $1.20 per share in 2015, respectively, over the same time frame.
Omnicell reported better-than-expected first quarter results beating the consensus on both lines. However, we are concerned with the escalating product costs.
Omnicell’s total cost of revenues was up 13.2% year over year to $47.3 million. Cost of product sales were up 13.2% year over year to $47.3 million. Although gross profit improved 20.1% to $54.5 million, gross margin contracted about 147 basis points to 53.6% in the quarter. We expect this to continue even in the coming quarter as an unfavorable product mix will lead to a drag in gross margin.
Although the three-pronged strategy of domestic expansion, selective acquisitions and targeted international expansion is expected to yield positive results, near-term visibility is still a matter of concern.
Constrained hospital spending remains a major headwind for the company. The ongoing hospital consolidation trend that might alter Omnicell’s client base warrants caution. Moreover, the company faces intense competition in the medication management and supply chain solutions market with larger players ruling the roost.
Other Stocks to Consider
Investors interested in the broader medical sector could consider stocks like Accuray Incorporated (ARAY), Masimo Corporation (MASI) and Natus Medical Inc. (BABY). All the three stocks carry a Zacks Rank #2 (Buy).
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