On Apr 7, 2015, we issued an updated research report on Omnicell Inc. OMCL. We are relieved that the long-awaited investigation results related to certain whistleblower allegations against Omnicell have finally been announced in favor of the company.
After a thorough investigation, Omnicell concluded that a letter was written by one of its sales representative in 2010 to a single customer summarizing terms of a quotation. The letter was presented to the customer in the normal course of the sales process. According to Omnicell, this letter did not promise discounts to the customer.
Upon review of documents and other information related to this allegation and other sales activity, the company reaffirmed that financial controls were operating effectively. Accordingly, the company also announced that it has regained the Nasdaq listing compliance which was earlier lost due to delay in filing its Annual Report.
We are also impressed with Omnicell’s better-than-expected fourth-quarter 2014 financial numbers. With the successful application of its three strategies, Omnicell has doubled its revenues and tripled its profits over the past five years. Moreover, several contract wins globally are likely to boost organic growth.
Through 2014, the company posted solid new customer wins and this trend is expected to continue in the upcoming period as well. In addition, the Surgichem acquisition has already enhanced Omnicell's existing customer base by absorbing independent retail pharmacy customers.
However, we are concerned with 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. In addition, the company faces intense competition from larger players in the medication management and supply chain solutions market.
Meanwhile, the Zacks Consensus Estimate for earnings for 2015 is currently pegged at 99 cents per share, reflecting a year-over-year decline of 4.37%. However, the expected long-term earnings growth rate for the stock is 17.7%.
The stock currently carries a Zacks Rank #3 (Hold).
Key Picks from the Sector
Some better-ranked stocks in the broader medical sector are Chemed Corp. CHE, Almost Family Inc. AFAM and LHC Group, Inc. LHCG. All the three stocks carry a Zacks Rank #1 (Strong Buy).
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