Investing.com’s Q3 earnings preview

Investing.com — The third-quarter earnings season for MedTech stocks comes at a crucial time, after a tumultuous second quarter that forced investors to recalibrate their expectations.

According to analysts at Citi Research, MedTech companies have shown some recovery from the sharp corrections seen in the second quarter, but investors remain cautious about future results, especially since the third quarter is traditionally a challenging quarter for the sector.

As key medtech stocks get ready to report earnings, the narrative is being shaped by factors such as macroeconomic headwinds, Federal Reserve decisions and individual company developments, particularly in terms of product pipelines and regulatory outcomes.

The broader MedTech sector, as represented by the S&P Equipment & Supplies Index, has narrowed its year-to-date gap, but it still remains. The sector rose 11%, compared with the broader market’s 20% gain.

A major factor in this rebound was the reset of valuations after the second quarter, bringing prices to more attractive levels.

However, Citi Research analysts maintain a cautious stance heading into the third quarter, stressing the importance of future guidance, particularly for 2025, as it could strongly influence stock price action in the near term.

Companies like Becton Dickinson (NYSE: ) and Edwards Lifesciences (NYSE: ) are getting attention as Citi analysts make adjustments. For Becton Dickinson, Citi Research upgraded the stock to “buy” from “neutral,” citing the favorable timing of its acquisition of Critical Care assets from Edwards Lifesciences, which puts upward pressure on earnings estimates.

The stock has been limited for years, but analysts believe this could be the time for a breakout, thanks to initial guidance for FY25 that is achievable. Becton Dickinson’s forward price-to-earnings ratio has compressed significantly, allowing room for a potential outperformance.

In contrast, Edwards Lifesciences, while maintaining a positive catalyst monitor, faces uncertainty regarding its earnings trajectory, particularly after recent 2025 earnings guidance.

The company recently sold its Critical Care unit, and while its structural heart replacement and transcatheter aortic valve businesses remain strong, Citi cut its price target for the stock from $83 to $77 due to more conservative expectations for anticipated earnings.

Elsewhere, Tandem Diabetes (NASDAQ: ) was placed on a negative catalyst, with analysts expressing concern about the company’s ability to meet its third-quarter guidance.

Tandems’ US patient share is expected to remain flat, making management’s implied guidance for patient share expansion in the fourth quarter seem overly optimistic.

Against this backdrop, Citi analysts are cautious about beating Tandem Diabetes’ earnings expectations for the quarter.

On a broader scale, while individual companies face product-specific and competitive challenges, macroeconomic drivers loom large for the sector.

Citi analysts note that the broader market is awaiting more clarity on the US labor market and Federal Reserve policy, with potential interest rate cuts a critical factor that could prompt a spin in small- and mid-cap MedTech names.

However, volatility and investor hesitancy following second-quarter surprises may temper any major share price moves in the third quarter.

The third quarter earnings season will also highlight the difference between large-cap and small/mid-cap MedTech companies.

Citi analysts note that while large-cap multiples recovered slightly, valuations of small/mid-cap companies continued to decline.

This divergence is likely to persist unless there is a significant change in market sentiment or interest rates, or if consolidation activity in the sector heats up.