Shares of pain-management equipment specialist Zynex (ZYXI +0.00%) were falling in Friday trading, down as much as 23.4%, before recovering to a 13.4% decline as of 3:25 p.m. EDT.
The medical equipment company reported earnings last night that, on a headline basis, disappointed mightily. But there were actually some good reasons for the soft numbers, making the pullback in this small-cap stock a potential buying opportunity.
OTC: ZYXI
Key Data Points
Earnings were light but partly by design
In the second quarter, Zynex grew revenue by 11% to $49.9 million with earnings per share (EPS) of $0.04, which was actually down 55% from the $0.09 print in the year-ago quarter. Both figures missed analyst estimates. Management also lowered the company's full-year outlook and is now expecting "just" 9% growth relative to 2023.
It's therefore no surprise that investors sold the stock on the headline. However, at least some of the slower growth was by design. For instance, management attributed the revenue miss largely to the company letting go a significant number of underperforming sales representatives in the quarter. This will have a short-term impact on revenue growth but should also make the company more efficient and profitable over time.
So why, then, were profits down? This was attributed to two things: First, management noted faster sales of private label products, which do carry high margins but are lower priced and don't have the total profit dollars of the company's core NexWave nerve and neuromuscular electric stimulation product.
Second, the company is also investing in trials for four entirely new products in hospital monitoring systems: The NICO pulse oximeter; the CM-1600 blood and fluid monitor; HemeOx, a total hemoglobin monitor; and a sepsis monitor. All of these products are under Zynex Monitoring Solutions (ZMS), a division that has basically no revenue yet.
The investment in these products is depressing current earnings as ZMS prepares for FDA clearance late this year and into 2025. Management noted it expects to bring the NICO monitor to market and for it to start generating revenue in the back half of 2025.
Stripping away the negative impact of ZMS investments, management noted the core pain-management operating income was actually up 10% through the first half, and thanks to current culling of unproductive sales reps, should grow 20% for the year.
Zynex could be an opportunity for aggressive investors
Zynex is a small company, and the headline-earnings miss won't help. However, while 2024 is seeing some headwinds, the stock now trades below 10 times 2025 EPS estimates.
Moreover, Zynex is still profitable and has been repurchasing stock while also investing in new products. If some of the new products take off next year or beyond, this unloved and overlooked stock could end up being a bargain at today's discount.
