Investing.com – The third-quarter earnings season for MedTech stocks comes at a critical time, after a tumultuous second quarter that forced investors to recalibrate expectations.
According to 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 since the third quarter traditionally represents a challenging quarter for the sector.
As major medtech stocks prepare to report earnings, the narrative is being shaped by factors such as macroeconomic headwinds, interest rate decisions by the Federal Reserve, individual company developments, especially regarding product pipelines and regulatory outcomes.
The broader MedTech sector, represented by the S&P Equipment & Supplies Index, has narrowed its gap year so far, but is still ahead. The sector rose 11%, compared to the broader market’s 20% gain.
The main driver of this recovery was the reset of valuations after the second quarter, which pushed prices to more attractive levels.
However, Citi Research analysts maintain a cautious stance heading into the third quarter, stressing the importance of forward guidance, especially for 2025, as it could significantly impact stock price movement in the near term.
Companies like Becton Dickinson (NYSE:) and Edwards Lifesciences (NYSE:) are attracting attention as Citi analysts make adjustments. For Becton Dickinson, Citi Research upgraded the stock to ‘buy’ from ‘neutral’, citing good timing for the acquisition of critical care assets from Edwards Lifesciences, providing upward pressure on earnings estimates.
The stock has been range-bound for years, but analysts believe this could be a good time for a breakout, thanks to FY25 guidance being achievable. Becton Dickinson’s forward P/E ratio has been compressed significantly, leaving room for potential outperformance.
In contrast, Edwards Lifesciences, while maintaining a positive catalyst watch, faces uncertainty around its earnings trajectory, especially after recent 2025 earnings guidance.
The company recently sold its critical care unit, and while its structural heart valve replacement and transcatheter aortic valve businesses remain strong, Citi lowered its price target on the stock from $83 to $77 on a more conservative forward earnings outlook.
Elsewhere, Tandem Diabetes (NASDAQ:) was placed on a negative catalyst watch, with analysts expressing concern about the company’s ability to meet its third-quarter guidance.
Tandem’s share of new patients in the US is expected to remain flat, making management’s implicit guidance to expand patient share in the fourth quarter appear overly optimistic.
Against this backdrop, Citi analysts are cautious about Tandem Diabetes’ earnings outlook for this quarter.
More broadly, while individual companies grapple with specific competitive challenges, macroeconomic factors loom large for the sector.
Citi analysts note that the broader market is waiting for more clarity on the US labor market and Federal Reserve policy, with potential interest rate cuts being a deciding factor that could trigger a shift to small- and mid-cap MedTech names.
However, volatility and investor hesitation in the wake of the second quarter’s surprises may temper any significant stock price movements in the third quarter.
The third-quarter earnings season will also highlight the difference between large-cap and small- and mid-cap MedTech companies.
Citi analysts note that although multiples for large-cap companies have rebounded slightly, valuations for small- and mid-cap companies have continued to decline.
This divergence is likely to persist unless there is a tangible shift in market sentiment or interest rates, or if consolidation activities in the sector intensify.