On Dec 4, 2015, we issued an updated research report on California-based molecular diagnostics provider – Cepheid CPHD. The company develops varied diagnostic assays that enable rapid, sophisticated molecular testing for organisms and genetic diseases by automating complex manual laboratory procedures.
Cepheid delivered a mixed performance in the third quarter outshining the Zacks Consensus Estimate on the bottom-line front, but missing the same for revenues. Nevertheless, management’s confidence in the company’s ability to achieve the adjusted gross margin target of 60% by 2017, lends optimism to the stock.
Given the size of Cepheid’s international business, the financials of the company are subject to the impacts of foreign currency fluctuations. Currently, although the company has a cash flow hedging program in place, a sizable portion of its 2015 international revenues was not hedged prior to the strengthening of the U.S. dollar (in effect since Jan 2015), especially for the second half of 2015. This in turn is expected to have an adverse effect on Cepheid’s international revenues, going ahead.
Earlier, management had announced that every incremental 2% strengthening of the U.S. dollar will negatively affect Cepheid’s international revenues and gross margin by approximately $1 million.
Moreover, Cepheid’s competitors include some large corporations that have greater resources and deeper pockets compared to it, which in turn might adversely impact the uptake of Cepheid’s offerings in the market. Also, adverse regulatory issues might hamper the company’s profit margin.
On a brighter note, with the inclusion of additional Xpert tests in the available menu, Cepheid expects rapid expansion in the addressable market (from $4 billion today to $8 billion by 2020). To make use of the opportunity further, Cepheid seeks to expand its international foothold, wherein it already enjoys a positive growth trajectory, particularly in Europe. Currently the company is eyeing expansion in the emerging markets of Asia and Latin America and the high-focus Japanese market.
Currently, Cepheid carries a Zacks Rank #4 (Sell).
Key Picks in the Sector
Some better-ranked medical products stocks are Masimo Corporation MASI, Natus Medical Inc. BABY and Steris Plc STE. All the three stocks sport a Zacks Rank #1 (Strong Buy).
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