On Feb 9, 2015, we issued an updated research report on Omnicell Inc. (OMCL). The company recently reported a better-than-expected fourth-quarter 2014 with both the top and the bottom line surpassing the respective Zacks Consensus Estimate.
Although the company delivered a balanced segmental improvement in the quarter, we are concerned with the continued drag in gross margin. Nevertheless, we are impressed that, with the successful application of its three-legged strategy targeted toward growth, viz. compellingly differentiated products, expansion into new markets and targeted acquisition, Omnicell has successfully doubled its revenues and tripled its profits over the past five years.
Adjusted earnings per share (EPS) of 28 cents (considering stock-based compensation as a regular expense) were up 27.3% year over year. Adjusted EPS also surpassed the Zacks Consensus Estimate by 4 cents.
Revenues increased 14.8% year over year to $121.5 million in the quarter, exceeding the Zacks Consensus Estimate of $115 million, primarily on the back of the momentum that management observed in the creation of new customers.
Through 2014, the company posted solid new customer wins and this trend is expected to continue in the upcoming period as well. The company has new accounts which include the likes of Memorial Sloan Kettering Cancer Center in New York. In addition, the Surgichem acquisition has already enhanced Omnicell's existing customer base by absorbing independent retail pharmacy customers.
Market expansion is also progressing at a rapid pace. While Omnicell continues to focus on the Middle East, the U.K. and China, we are impressed with the company’s initiative to increase product adoption rate in other parts of the world too. We believe Omnicell remains high on a customer's demand list, given the improved efficiency and safety capabilities of the technologies offered by it.
However, we are concerned with the escalating product costs. The company expects this trend to continue even in the coming quarter as an unfavorable product mix will lead to a drag in gross margin. Constrained hospital spending remains a major headwind for the company. The ongoing hospital consolidation trend that might alter Omnicell’s client base also warrants caution. Moreover, the company faces intense competition from larger players in the medication management and supply chain solutions market.
The stock currently carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Some better-ranked stocks in the broader medical sector are Allscripts Healthcare Solutions, Inc. (MDRX), athenahealth, Inc. (ATHN) and Medidata Solutions, Inc. (MDSO). All of these three stocks carry a Zacks Rank #2 (Buy).
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