On Jan 8, 2015, we issued an updated research report on California-based Volcano Corporation (VOLC).
This leading provider of intravascular imaging and therapy for coronary and peripheral applications reported impressive third-quarter 2014 financial results on Nov 6, 2014.
Volcano reported adjusted loss per share of 4 cents in the quarter, narrower than the Zacks Consensus Estimate by 20%. The bottom line also improved a significant 50% from the year-ago loss figure.
On the other hand, revenues climbed 1.7% year over year to $97.5 million beating the Zacks Consensus Estimate by a whisker.
Despite an impressive third quarter, Volcano lowered its 2014 revenue expectation to take into account currency headwinds. The company now expects revenues to range from $393–$397 million as against the previous guidance of $397–$401 million. However, Volcano revised its adjusted loss per share guidance to 16-18 cents for 2014, as against the earlier guided loss of 16-19 cents per share, which reflects a better outcome is expected from the company's bottom line front.
More recently, in Dec 2014, Volcano entered into a merger agreement whereby Koninklijke Philips N.V (PHG) – a Netherlands-based diversified technology company will buy Volcano for $1 billion. This buyout will give rise to a leading enterprise in the global image-guided therapy market.
It has been observed that advanced catheters that can produce intravascular ultrasound (IVUS) or perform fractional flow reserve (FFR) are increasingly gaining popularity in image-guided treatment of the heart and blood vessels.
Given Volcano's leading position in IVUS imaging and FFR measurements, its merger with Philips will create a combined entity, capable of developing innovative and efficient IVUS and FFR products for the global market. Once the merger is over, management expects revenues for the combined company's image guided therapy business to grow at a high single-digit rate by 2017.
Although the merger news initially excited investors, any further upside in the stock's price remains limited at the moment.
However, we are worried about the intense competition that Volcano is facing in its products offerings that could result in pricing pressure and reduced margins, inducing an adverse impact on the company's performance. Moreover, foreign currency headwinds have also been affecting Volcano's operating results as is evident from the margin contraction observed in the third-quarter results. Nevertheless, we remain impressed with the company's pipeline development program as well as its penetration in the peripheral markets.
Currently Volcano retains a Zacks Rank #3 (Hold), while Philips carries a Zacks Rank #5 (Strong Sell).
Key Picks from the Sector
Some better-ranked companies worth reckoning in the medical instruments industry are ABIOMED, Inc. (ABMD) and Electromed, Inc. (ELMD). Both these stocks carry a Zacks Rank #2 (Buy).
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