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Why Avanos Medical Is Dropping Today

By Brian Feroldi – Nov 5, 2019 at 6:27AM

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Shares slump after the company reports weak third-quarter results and cuts guidance. Here's what investors need to know.

What happened

Shares of Avanos Medical (AVNS 2.07%), a diversified medical device company, had dropped 18% as of 10:58 a.m. EST on Tuesday. The double-digit drop is the result of weak third-quarter results that featured a guidance cut.

So what

The headline numbers from the quarter weren't great:

  • Sales jumped 4% to $171 million. That was more than 5% below Wall Street's expectation.
  • Adjusted gross margin contracted by 800 basis points to 57%.
  • Net loss was $12 million, or $0.24 per share.
  • Adjusted EPS was $0.30, down from $0.37 in the year-ago period. This was also below the $0.32 that Wall Street had expected.
Businessman using magnifying glass to examine a piece of paper.

Image source: Getty Images.

The weak third-quarter results caused management to lower its full-year guidance, too:

  • Revenue is now expected to grow 5% to 7%, down from its prior outlook of 8% to 10%.
  • Non-GAAP (adjusted) net income is expected to land between $1.00 and $1.10. That's also down from the prior outlook, which was $1.15 to $1.25.

Traders are fleeing in response to the weak results and lowered guidance.

Now what

Avanos' CEO, Joe Woody, shared some color with investors on why the company's third-quarter results were so weak:

Our performance gap this quarter was due primarily to product back orders and supply chain challenges stemming from the implementation of our new IT system and an unexpected distributor inventory drawdown impacting our chronic care business. Our teams are working hard to address the implementation challenges of our new IT system. Overall, I'm confident the steps we're taking will enable us to address those challenges, meet customer demands, and increase shareholder value, as we continue investing for growth, prudently managing expenses, and strategically deploying capital.

It's possible that today's sell-off is an overreaction and that Avanos is trading in value stock territory right now. That's especially true if management actions can get this company's growth heading in the right direction again. However, I'll have to see signs that the plan is working before I consider shares to be worth buying, so my plan is to focus my attention on other healthcare stocks at the moment.

Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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