NuVasive (NUVA) Grappling With Odds: Should You Dump Stock?

On Jun 28, we issued an updated research report on San Diego, CA-based NuVasive, Inc. (NASDAQ:NUVA) . The company is a major player in the global spine market, focused on developing minimally-disruptive surgical products and procedurally-integrated solutions for the spine. The stock currently has a Zacks Rank #4 (Sell).

For the last three months, NuVasive has been trading below the Zacks categorized Medical Product industry. The company has gained only 0.3% over the past three months, as compared to the broader industry’s 9.0% gain. Per management, the company’s low-margin Biotronic business continues to affect its bottom line. Also, foreign currency fluctuation had a considerable negative impact on sales.

Pricing continues to be a major headwind for NuVasive as is evident from the declining prices for its products affected by stiff competition in the spine market; pricing pressure experienced by hospital customers from managed care organizations, insurance providers and other third-party payers.

Although the market for spine surgery procedures will continue to grow, the industry is highly susceptible to changes in economic, political and regulatory factors. These changes include pricing pressure imposed by the continued consolidation of hospital customers and the expansion of group purchasing organizations, unfavorable third-party payer coverage, reimbursement policies, and new and proposed legislation and regulations designed to contain or reduce the cost of healthcare.

The presence of a large number of players has made the medical devices market intensely competitive. The orthopedic industry, in particular, is highly competitive with the presence of bigwigs like Zimmer Holdings (NYSE:ZBH), Stryker, Johnson & Johnson’s DePuy, Smith & Nephew (LON:SN), Wright Medical and Medtronic (NYSE:MDT).

For the last three months, NuVasive has a P/E (F12M basis) multiple of 33.8, showing that it is overvalued when compared to the Zacks categorized Medical Products Industry’s P/E (F12M basis) multiple of 21.3. Even when compared to the market at large, the stock looks overvalued, as the P/E for the S&P 500 is 18.2. We believe the company’s focus on operational efficiency, in-house manufacturing facility and product launches will keep the valuation stretched for a while.

On a positive note, according to management, the international market holds bountiful opportunities for NuVasive. The company is experiencing steady improvement in its performance in the emerging markets of Latin America and Asia Pacific. The year-over-year improvement on the top-line front is on account of strong procedural growth in the U.S. as well as internationally.

We are also optimistic about NuVasive’s recent progress in development of technologies and services for spine surgery. We are encouraged by the company’s focus on product development, mainly core implant offerings. To support and complement product development, the company claims to have an active corporate development pipeline. NuVasive is currently looking forward to expand the portfolio of its XLIF procedure in the spine market. The company’s U.S. surgical support business also performed well in recent times.

Key Picks

A few better-ranked stocks in the medical sector are Align Technology, Inc. (NASDAQ:ALGN) , Inogen, Inc. (NASDAQ:INGN) and Accelerate Diagnostics, Inc. (NASDAQ:AXDX) . Notably, Inogen sports a Zacks Rank #1 (Strong Buy), while Align Technology and Accelerate Diagnostics carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Align Technology has an expected long-term adjusted earnings growth of almost 24.1%. The stock has added around 31% over the last three months.

Inogen has a long-term expected earnings growth rate of 17.5%. The stock has gained approximately 20% over the last three months.

Accelerate Diagnostics has an expected long-term adjusted earnings growth of 30%. The stock has added roughly 17.9% over the last three months.

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