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Needham says he expects slow growth in the orthopedic device market later this year, but sees Enovis (NYSE:ENOV) and Paragon 28 (NYSE:FNA) capable of beating the trend.
The investment bank said it expects market growth for products slow 4% to 5% for 2024 and beyond. By comparison, 2023 saw growth of 7%, the highest rate in over a decade, barring a pandemic “recovery” in 2021.
Needham attributed last year’s robust earnings to the pandemic-related backlog, improving pricing, enabling technologies and new launches driving the product mix.
“In our view, the procedural backlog and pricing are not sustainable,” the analysts wrote in their note. “However, we believe the mix effect and enabling technologies are likely to last longer.”
Needham said that, after attending the annual meeting of the American Academy of Orthopedic Surgeons, or AAOS, earlier this month, he is favoring Enovis (ENOV) and Paragon 28 (FNA), given the launch of new products and “attractive” ratings.
Enovis shares have been on the rebound since early January, rising 12% year to date as of Feb. 25, thanks in part to its recent acquisition of Lima for about $1 billion and a fourth-quarter earnings report that beat the market. Needham placed the title on the 2024 sentencing list in December.
“We expect ENOV’s new product launches, the strength of the orthopedic market and the Lima acquisition to drive the consensus higher into 2024,” Needham analysts commented.
Other firms like Stephens are also bullish on the stock. Of the 12 analysts tracked by SA who follow Enovis, 9 rated the stock as a strong buy, 2 as a buy and 1 as a hold. The stock’s Quant rating is currently a Buy, despite earning a D rating.
Paragon 28 is another Needham favorite, with the company citing new bunion-focused products and supply chain improvements, along with continued sales force expansion and surgeon training. Needham added that he believes Paragon 28 “can return to its historic revenue growth of approximately 20% in 2024.”
Paragon 28 shares are up 7% year to date, helped by a positive preliminary revenue report released in early January. The company is expected to release its fourth quarter report on February 29.
Of the 7 SA-tracked analysts covering Paragon 28, 4 rated it a Strong Buy and 3 rated it a Buy. However, the stock’s quantitative rating is currently maintained, in part due to a D in the rating.
Needham also maintained a buy rating on CONMED (CNMD) and hold ratings on Zimmer Biomet (ZBH) and Stryker (SYK).
Other leading orthopedic device manufacturers include Johnson & Johnson (JNJ), Medtronic (MDT), Smith + Nephew (SNN), Globus Medical (GMED), Orthofix (OFIX), and ZimVie (ZIMV).