Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.
What: Shares of cardiovascular-focused medical device company Volcano (UNKNOWN:VOLC.DL) dropped as much as 13% earlier in the trading session after releasing the company released its third-quarter earnings results.
So what: For the quarter, Volcano recorded a 9% increase in revenue to $93.7 million and a slight drop in net income year-over-year to $0.04. These results were more or less in line with Wall Street's expectations. Growth was led by its fractional flow reserve products, which grew by 54% and were hampered by negative currency translations, which added a negative 300 basis point effect. The real impetus for the drop was Volcano's full-year guidance -- which called for revenue of $380 million-$384 million versus prior expectations of $384 million-$390 million because of the transition to a direct sales model in Spain -- and upping the company's operating expense forecast to 50%-60% of revenue versus its previous projections of 58%-59%.
Now what: Falling revenue forecasts and rising expenses (i.e., lower margins) are definitely not what shareholders of a company valued at more than 50 times forward earnings had in mind. Medical device companies are already facing the uncertainties of the medical device excise tax going into effect next year, and this is probably the last thing shareholders want to see. This is one of those cases where the products show a lot of promise, but a low double-digit growth rate hardly merits its frothy valuation.
Craving more input? Start by adding Volcano to your free and personalized watchlist so you can keep up on the latest news with the company.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
Motley Fool newsletter services have recommended buying shares of Volcano. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.