Updated Research Report on Cepheid

Recently, we issued an updated research report on Cepheid (CPHD). The company reported a better-than-expected fourth-quarter 2013. Moreover, its strong outlook for 2014 makes us confident about Cepheid’s business model that promises to retain the positive momentum over the long haul.

Barring the second quarter of 2013, Cepheid has delivered positive surprises in each of the last four quarters, with an average beat of 36.29%. However, the company’s loss per share in the last reported quarter, although narrower than the Zacks Consensus Estimate, was down a huge 1,035% on a year-over-year basis.

Despite this, the company posted a decent outlook for 2014. It expects total revenue in the range of $446–$461 million. The Zacks Consensus Estimate falls at the lower end of the guidance range. Further, Cepheid anticipates adjusted net income in the range of 24 cents–29 cents per share. The current Zacks Consensus Estimate of 7 cents per share remains far below the expected range.

Cepheid serves a fast-growing molecular diagnostic market with strong demand for its tests. We believe that the ongoing efforts for capacity expansion should enable the company to meet the market demand for its offerings. The company expects to launch a gamut of tests in the U.S. as well as the overseas market by the end of 2017. In our opinion, test menu expansion is a significant growth catalyst for this molecular diagnostic company.

The company’s quarterly top-line performance generates optimism with revenues edging past the Zacks Consensus Estimate. Revenues surged a significant 23% year over year on the back of strong market adoption of GeneXpert Systems and broadening reach of the Xpert test portfolio. Growth was also driven by strong business in HBDC and improved performance in the commercial clinical business.

Margin pressure however still remains as an area of concern on account of unfavorable mix toward the lower-margin HBDC business. Also, a difficult capital spending environment continues to pose challenges for Cepheid. This is reflected in the poor fiscal guidance provided by the company. The stock currently carries a Zacks Rank #5 (Strong Sell).

Key Picks from the Sector

Nonetheless, medical stocks such as Natus Medical Inc. (BABY), AngioDynamics Inc. (ANGO) and ABIOMED, Inc. (ABMD) are expected to do well. While Natus Medical carries a Zacks Rank #1 (Strong Buy), AngioDynamics and ABIOMED have a Zacks Rank #2 (Buy).

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