MedTech Stock: Third Quarter Earnings Preview

The third quarter earnings season for MedTech stocks arrives at a pivotal moment, following a turbulent second quarter that forced investors to reassess their expectations.

According to analysts at Citi Research, MedTech companies have shown some recovery since the significant corrections experienced in the previous quarter. However, investors remain cautious about the forthcoming results, particularly as the third quarter is typically challenging for the sector.

As key medical technology stocks prepare to report their earnings, the landscape is influenced by various factors, including macroeconomic challenges, the Federal Reserve’s decisions on interest rates, and specific developments within individual companies, particularly regarding product pipelines and regulatory outcomes.

The broader MedTech sector, represented by the S&P Equipment & Supplies Index, has somewhat narrowed its gap with the S&P 500 year-to-date, although it still lags behind. The sector has risen by 11%, compared to the broader market’s 20% gain.

A significant factor in this recovery has been the recalibration of valuations following the second quarter, making prices more appealing for investors. Yet, Citi Research analysts maintain a cautious outlook as they head into the third quarter, highlighting the importance of future guidance, especially for 2025, which could profoundly affect stock price movements in the near future.

Companies such as Becton Dickinson and Edwards Lifesciences are attracting attention as Citi analysts adjust their ratings. Becton Dickinson has received an upgrade to “buy” from “neutral,” thanks to the favorable timing of its acquisition of Critical Care assets from Edwards Lifesciences, which is expected to positively impact earnings estimates.

Despite being range-bound for several years, analysts believe this could be a breakout opportunity for Becton Dickinson, particularly with achievable initial guidance for fiscal year 2025. The stock’s forward price-to-earnings ratio has also compressed significantly, suggesting room for potential outperformance.

In contrast, Edwards Lifesciences, despite a positive outlook, faces uncertainty regarding its earnings trajectory following recent guidance for 2025 earnings. The company has recently divested its Critical Care unit, and while its structural heart and transcatheter aortic valve replacement segments remain robust, Citi has lowered its price target on the stock from $83 to $77 due to more conservative earnings expectations.

On another note, Tandem Diabetes has been placed under a negative catalyst watch, with analysts concerned about the company’s ability to achieve its third quarter guidance. The anticipated patient share in the U.S. is expected to remain stagnant, making management’s projected growth for the fourth quarter appear overly optimistic. Consequently, Citi analysts express caution regarding Tandem Diabetes meeting earnings expectations for the quarter.

On a broader scale, while individual companies grapple with product-specific and competitive challenges, overarching macroeconomic factors also loom large for the sector. Citi analysts indicate that the market is seeking further clarity on the U.S. labor market and Federal Reserve policy, with potential interest rate cuts being a critical element that could drive a shift towards small and mid-cap MedTech stocks.

However, the volatility and investor caution resulting from the surprises of the second quarter may temper any substantial stock price movements in the third quarter. The earnings season will likely underscore the divide between large-cap and small/mid-cap MedTech companies.

Citi analysts observe that while large-cap multiples have seen a slight rebound, valuations for small and mid-cap companies have continued to decline. This divergence is expected to persist unless there is a notable shift in market sentiment, changes in interest rates, or an acceleration of consolidation activity within the sector.