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Why K2M Group Holdings Inc. Sank Today

By Brian Orelli, PhD - Oct 9, 2017 at 2:11PM

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Disappointing preliminary third-quarter revenue from the medical-device company has shares trading lower.

What happened

K2M Group Holdings (NASDAQ: KTWO) is down 18.6% at 1:07 p.m. EDT after the company released disappointing preliminary revenue for the third quarter, with revenue up just 6% year over year. The medical-device company also lowered guidance for 2017.

So what

In the second quarter, revenue was up 10.9% year over year, so the 6% seen in the third quarter is a substantial slowdown. K2M's president and CEO Eric Major blamed the shortfall on a pair of issues: "slower than planned acceleration of new distribution in the U.S." and "disruption of account activity and canceled procedures related to the hurricanes in Texas, Florida and, to a lesser extent, Puerto Rico, in early September."

Working backwards, hurricanes are certainly out of the company's control, and it isn't surprising that the recent storms would cause procedures to be canceled. Of course, those patients' spines aren't going to get better on their own, so storms should cause revenue to be delayed rather than lost altogether. K2M estimates that the three hurricanes will lower revenue by about $2 million for the year.

The bigger issue appears to be the slower distribution. K2M is guiding for 2017 revenue of $255 million to $257 million, compared to previous guidance of $263 million to $270 million. At the low end, factoring in the $2 million for the storms, expected revenue is down $6 million. The effect is seen in guidance for U.S. revenue growth, which is expected to increase approximately 8% to 9% year over year in 2017, compared to previous guidance for year-over-year growth of 12% to 15%.

Doctor looking at an X-ray of a spine with a model of a spine in the background

Image source: Getty Images.

There is one positive for K2M: It seems to be accelerating international revenue. After the second quarter, it bumped international sales to "mid-single-digit growth" from a previous expectation of "low single-digit growth." And then, with this update, K2M set its 2017 goal for international revenue at 9% growth on a constant currency basis.

Now what

Investors will have to wait until Nov. 1, when K2M releases full third-quarter results, to get a fuller explanation of the issues with distribution, as well as how the lower revenue growth will affect the earnings line. Until investors get more information, today's reset in valuation seems appropriate.

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