Mindray Medical's Q2 Suggests Device Makers Are A Buy

Aug. 7.12 | About: Mindray Medical (MR)

Medical device manufacturing is strong! Therefore I am watching closely now Intuitive Surgical (ISRG), and the medical device segments of General Electric (GE), and Philips (PHG) and Siemens (SI). At least that is my takeaway from Chinese medical devices maker Mindray Medical International Limited's (MR)Q2 2012 adjusted earnings per share of 45 cents beat vs. the estimate of 44 cents. Reported net income moved up 16.1% year over year to $52 million (or 44 cents per share) in the quarter. Revenues were up sharply 23.3% year over year to $267.8 million, in Q2 beating the estimates of $258 million.

MR recorded international sales of $152.5 million, up 20.5% Y/Y. Revenues in China increased 27.1% Y/Y to $115.3 million in the reported quarter. The company performed well in other emerging markets with growth of 21.1%. Life support and patient status device sales grew 23.3% Y/Y in the reported quarter to $114.6 million. This accounts for about 43% of overall revenues. In-vitro diagnostic products revenues were $73.9 million, up 31.1%. Medical imaging systems sales rose to $64.1 million, a growth of 15.1%. Other revenues were up 24.4% to $15.1 million.

Adjusted gross profit amounted to $154.8 million in Q2, an increased of 23.7% Y/Y. Adjusted gross margin was 57.8% vs. 57.6% in the year-ago period. Adjusted selling expenses were $45.5 million, or 17% of total net sales. Adjusted general and administrative expenses were $23.3 million, or 8.7% of sales, versus 7.7% a year ago. Adjusted research and development expenses were $22.5 million, or 8.4% of sales, compared with 8% in the prior-year quarter. Adjusted operating income remained at $63.5 million in the quarter, 21% growth Y/Y. Adjusted operating margin was 23.7%, lower than 24.2% in the year-ago quarter.

The balance sheet looks strong. As of Q2, MR had $710.1 million in cash and liquid investments, up about 52% from the year ago. Long-term bank loan stood at $85.1 million, up 143.3% MR provided full year guidance. The company continues to forecast sales growth in excess of 18% for 2012. It also expects adjusted net income for the year to increase by a minimum of 15% Y/Y, up from 13% projected before.

Right now I am monitoring MR's price action and see it as a positive sign for ISRG, GE, PHG and SI. MR launches several new products each year. Most recently in 2011with 13 new products. The company has entered the premium segment globally, where its competitive advantage is still unclear. One concern is healthcare reform in China and the U.S. These reforms have the potential to reduce demand. Further, the space is competitive, which forces MR to maintain new products in the pipeline while facing pricing issues to stay on top of competitors. However, this Q2 was strong, and I see continued potential for growth in Q3 and Q4 2012.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MR, ISRG over the next 72 hours.