MDS Earnings Preview: Operating Performance Improving

Operating performance, not the headlines surrounding MDS Nordion, should be the focus of investors when life sciences company, MDS Inc. (MDZ), reports third quarter earnings next week, analysts say.

MDS Nordion, a subsidiary of MDS Inc., that distributes medical isotopes worldwide, is in the midst of a supply crunch, due to a global shortage for medical isotopes made worse last week following the closure of a nuclear reactor in Belgium.

Mr. Maletic, analyst at Scotia Capital said:

While the first half of the year has been dominated by Nordion related news  (which shows no signs of abating), we continue to believe that the primary driver of value is consistently improving operating performance, particularly at Pharma Services. Therefore, investors should look through the Nordion noise for signs of improvement in the core business.

He also said Nordion, which is down year-over-year, should show signs of improved performance relative to early 2008. He maintained his "Sector  Perform"  rating on MDS stock and left his 1-year target price unchanged at C$20.

The shares are trading flat on Tuesday afternoon at C$16.26, well below its 52-week high hit last September.

Desjardins Securities analyst Maher Yaghi left his "hold" rating and C$19.50 based on expectations for improved profitability in the quarter at both Pharma Services and Analytical Technologies. He said he expects EBIT margins to increase from 12% to 16% by 2009, but noted any delay in margin recovery at Pharma Services would jeopardize his estimates.

In a research note, he wrote:

While we believe that the stock's valuation has become attractive after the recent pullback, we would need improved visibility on the duration of margin pressure at Analytical Technologies as well as on the trajectory toward improved profitability at Pharma Services before upgrading our recommendation.