By Investing.com — The third quarter earnings season for MedTech stocks comes at a crucial time, following a tumultuous second quarter that forced investors to recalibrate expectations.
As per analysts at Citi Research, MedTech companies have shown some recovery since the sharp corrections seen in the second quarter, but investors remain cautious about the upcoming results, especially as the third quarter is traditionally a challenging quarter for the sector.
With key stocks in the medical technology space poised to report their earnings, the narrative is shaped by factors like macroeconomic headwinds, the Federal Reserve’s rate decisions, and individual company developments, especially in terms of product pipelines and regulatory outcomes.
The broader MedTech sector, represented by the S&P Equipment & Supplies Index, has narrowed its gap with the S&P 500 year-to-date, but it still trails. The sector is up 11%, compared to the broader market’s 20% gain.
A major driver of this rebound has been the resetting of valuations post-the second quarter, bringing prices to more attractive levels.
However, Citi Research analysts maintain a cautious stance heading into the third quarter, emphasizing the importance of future guidance, especially for 2025, as it may heavily influence stock price action in the near term.
Companies like Becton Dickinson (NYSE:BDX) and Edwards Lifesciences (NYSE:EW) are drawing attention as Citi analysts make adjustments. For Becton Dickinson, Citi Research upgraded the stock to “buy” from “neutral,” citing the favorable timing of the acquisition of Critical Care assets from Edwards Lifesciences, which offers upward pressure on earnings estimates.
The stock has been range-bound for years, but analysts believe this could be the moment for a breakout, thanks to initial FY25 guidance that is achievable. Becton Dickinson’s forward price-to-earnings ratio has compressed significantly, allowing room for potential outperformance.
In contrast, Edwards Lifesciences, while maintaining a positive catalyst watch, faces uncertainty around its earnings trajectory, particularly after recent guidance on 2025 earnings.
The company recently sold its Critical Care unit, and while its structural heart and transcatheter aortic valve replacement businesses remain strong, Citi lowered its price target on the stock from $83 to $77 due to more conservative forward earnings expectations.
Elsewhere, Tandem Diabetes (NASDAQ:TNDM) has been placed on a negative catalyst watch, with analysts expressing concern over the company’s ability to meet its third quarter guidance.
Tandem’s new patient share in the U.S. is expected to remain flat, making the management’s implied guidance for patient share expansion in the fourth quarter appear overly optimistic.
Given this backdrop, Citi analysts are cautious about Tandem Diabetes’ beating earnings expectations for the quarter.
On a broader scale, while individual companies wrestle with product-specific and competitive challenges, macroeconomic factors loom large for the sector.
Citi analysts note that the broader market is waiting for more clarity on the U.S. labor market and Federal Reserve policy, with potential rate cuts being a critical factor that could prompt a rotation into small and mid-cap MedTech names.
However, volatility and investor hesitancy following the surprises of the second quarter may temper any major stock price movements in the third quarter.
The third quarter earnings season will also highlight the divergence between large-cap and small/mid-cap MedTech companies.
Citi analysts observe that while large-cap multiples have rebounded slightly, valuations for small/mid-cap companies have continued to decline.
This divergence is likely to persist unless there is a meaningful shift in market sentiment or interest rates, or if consolidation activity in the sector heats up.