Can Companion Animal Group Drive IDEXX's (IDXX) Q3 Earnings?

We expect IDEXX Laboratories, Inc. (NASDAQ:IDXX) to beat expectations when it reports third-quarter 2017 results on Oct 31, before the opening bell. Last quarter, the company delivered a positive earnings surprise of 11.8%. It is worth noting that IDEXX has outperformed the Zacks Consensus Estimate in each of the preceding four quarters, at an average of 9.3%. Let’s take a look at how things are shaping up prior to this announcement.

Key Catalyst

Similar to the prior quarter, IDEXX is expected to gain from strong global growth in Companion Animal Group (CAG) Diagnostics recurring revenues. The growth in CAG Diagnostics was led by double-digit organic revenue gains across consumable, reference lab and rapid assay revenues, as well as continued expansion of IDEXX's premium instrument installed base.

We are upbeat about the 300% year-over-year rise in the uptake of SNAP Pro units in North America last quarter. Management expects the solid performance to continue in the to-be-reported quarter as well.

The Zacks Consensus Estimate for CAG Diagnostics revenues of $426 million reflects an increase of 10.6% from the year-ago quarter.

Here are the other factors that might influence IDEXX’s third-quarter results:

IDEXX Laboratories, Inc. Price and EPS Surprise

IDEXX expects its Livestock, Poultry and Dairy (LPD) business to witness flat-to-modest growth in the second half of 2017. The segment has been seeing continued strength in China. Also, expansion of the recurring pregnancy testing franchise buoys optimism. The Zacks Consensus Estimate for the LPD business of $30.3 million for the third quarter reflects an increase of 1.7% from the year-ago quarter.

The company continues to expand globally. It has been significantly benefitting from the bountiful opportunities in the companion animal market of emerging nations. Further, management’s consistent share buybacks reflect its strong free cash flow reserve. We believe the outcome of these endeavors will be reflected in the company’s third-quarter performance.

Encouraged by these factors, IDEXX expects 2017 revenue in the range of $1,945-$1,965 million, reflecting organic revenue growth expectations between 10% and 11%. The Zacks Consensus Estimates for third-quarter total revenues are projected at $494 million, up 10.3% from the prior-year quarter

Management also estimates its 2017 EPS guidance to the band of $3.12-$3.22 per share, supported by continued operating margin expansion aligned with its long-term goals. The outlook represents EPS growth of 28-32% on a reported basis. The Zacks Consensus Estimate for earnings of $3.17 reflects an increase of 29.9% from the year-ago quarter.

Moreover, management is upbeat about the 12% rise in the sales force in the U.S. market and some other areas in the third quarter.

On the flip side, foreign currency fluctuation is a major headwind. Another concern for the company is its high reliance on third-party distributors. The purchasing dynamics of distributors have a significant impact on the company’s sales of instrument consumables and rapid assay products. Also, the company is exposed to higher operating expenses pertaining to increased head count along with higher investments targeted toward portfolio development and geographic expansion in the United States and internationally.

Also, the competitive landscape in the domestic and overseas markets weighs on IDEXX’s performance. The struggle to gain market traction might prove to be a drag on third-quarter 2017 results.

Here is what our quantitative model predicts:

IDEXX does not have the right combination of two main ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — needed for increasing the odds of an earnings beat.

Zacks ESP: The Earnings ESP for IDEXX is 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: IDEXX carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of a positive earnings surprise.

The Zacks Consensus Estimate for earnings of 75 cents reflects a 20.9% improvement on a year-over-year basis.

Stocks Worth a Look

Here are a few medical stocks worth considering as they have the right combination of elements to post an earnings beat this quarter.

The Cooper Companies, Inc. (NYSE:COO) has an Earnings ESP of +0.43% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Thermo Fisher Scientific Inc. (NYSE:TMO) has an Earnings ESP of +0.19% and a Zacks Rank #2.

Align Technology, Inc. (NASDAQ:ALGN) has an Earnings ESP of +0.74% and a Zacks Rank #3.

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