CNMD Upped to Hold
Zacks senior medical technology analyst Gregory Aurand, CFA has decided to upgrade to Hold from Sell the shares of surgical devices manufacturer CONMED Corporation (CNMD). We bring some relevant parts from his latest report to explain his position:
'Given the soft top-line outlook (up 5%-6% in 2008), we aren't sure the company can continue to generate above-average EPS growth through just margin improvement. Powered Surgical Instruments appears to be growing below the market rate, and endosurgery (up 21% in Q3) appears to be riding the tailwind from the Johnson & Johnson (JNJ) settlement that we believe is unsustainable.
'The company settled its ongoing endoscopic product anti-trust litigation against Johnson & Johnson in the first quarter through an agreement that resulted in a payment of $11 million to CNMD. Johnson & Johnson ceased the marketing practices which CONMED had challenged. Given the settlement just before the expected April trial date, future litigation expenses have been averted.
'We expect margins to improve given the elimination of forward legal costs. We believe the stock, at best, should trade in-line with competitors. At roughly an in-line 1.3x P/E/G on our 2008 EPS, or 16x 2008 EPS, our target moves to $24. As the stock reached our previous Sell target price our rating moves to Hold.'
VeriSign Outlook Encouraging
The following excerpts explain why Zacks information technology analyst Abdul Saleh remains bullish and issues a Buy recommendation to the shares of VeriSign, Inc. (VRSN), the IT services provider:
'VeriSign reported $373.6 million in revenue during Q3:FY07, up nearly 15% from the prior year (excluding Jamba!), and up 3% sequentially. Pro-forma EPS was $0.26, up from $0.24 in Q3:FY07. Gross margins grew 60 bps sequentially hitting 59.1%, the highest level of the year due to 1) lower headcount, 2) lower contract labor, and 3) lower direct cost of revenue in the CSG segment. But year-over-year, gross margins slipped about 400 bps, with about half of the decline attributed to the absence of Jamba! sales, which carried 74% gross margins.
'Pro-forma operating margins were 23.5% vs. 21.5% in 2Q07, and 19.4% in 3Q06. The margin improvement is expected to continue in 4Q07, and could hit 25% by year-end, which is consistent with the guidance provided by the former management team. We think VRSN is well-positioned while dealing with the management change and in spite of the weak Q4 guidance. The main catalysts going forward are the expectation of margin improvements and the prospect of restructuring in order to divest non-synergistic business segments.
'Cash-flow metrics continue to be encouraging. VeriSign ended Q3 with nearly $1.2 billion in net cash and investments, or $4.76 per share, compared to $799 million, or $3.20 per share, in Q2.
