Accuray (ARAY) Grapples With Falling Margin And Product Mix

On Aug 29, we issued an updated research report on Sunnyvale, CA–based Accuray Inc. (NASDAQ:ARAY) , a leading developer and designer of radiosurgery and radiation therapy systems for the treatment of tumors. The company currently carries a Zacks Rank #4 (Sell).

Accuray has had an unimpressive run in the bourse of late. A glimpse at the recent price performance reveals that its shares declined 8.0% over the past month, comparing unfavorably with the industry’s increase of 1.3%. The company has a dismal track record characterized by consecutive earnings miss in all the trailing four quarters.

Accuray witnessed low product margins in the fourth quarter of fiscal 2017 (ending Jul 31), down 80 basis points (bps) in to 36.4%. In fact, dismal performance by the product segment caused an adjusted loss of 6 cents per share, wider than the Zacks Consensus Estimate of loss of a penny.

Additionally, unsatisfactory performance by the CyberKnife and the Tomotherapy systems in Japan and Asia Pacific was a headwind. Unfavorable product mix and more replacement sales to the CyberKnife’s existing customer base caused the drag. Moreover, one-time employee severance related expenses and other one-time part costs dented the service margin in recent times.

Accuray’s top line is highly dependent on CyberKnife and TomoTherapy systems sales. However, both systems require high capital expenditures which act as a deterrent for healthcare providers.

On a positive note, we are particularly upbeat about the company’s extensive product portfolio, growing customer base (especially in EIMEA region) and international expansion initiatives that are poised to drive growth. Moreover, the receipt of 510(k) FDA approval for the Radixact Treatment delivery platform is likely to boost product revenues over the long haul.

Key Picks

Some better-ranked medical stocks are Edwards Lifesciences Corp. (NYSE:EW) , Lantheus Holdings, Inc. (NASDAQ:LNTH) and Stryker Corporation (NYSE:SYK) . Edwards Lifesciences sports a Zacks Rank #1 (Strong Buy), while Lantheus Holdings and Stryker carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Edwards Lifesciences has a long-term expected earnings growth rate of 15.2%. The stock has climbed around 19.4% over the last six months.

Lantheus Holdings has a long-term expected earnings growth rate of 12.5%. The stock has surged 28.6% over the last six months.

Stryker Corporation has a long-term expected earnings growth rate of 10.00%. The stock has rallied roughly 12.8% over the last six months.

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