Canaccord starts Merit Medical at buy

Canaccord Genuity initiated coverage of Merit Medical Systems (NASDAQ:MMSI) with a “buy” rating and $27 price target. The stock closed at $20.51 on Monday.

Merit develops, manufactures, and commercializes a vast array of medical devices, targeting interventional and diagnostic procedures.

“Gross margin improvement has been elusive over the past few years, but we believe the firm is (finally) on the cusp of a period of solid leverage,” writes analyst Jason Mills.

Mr. Mills’ optimism reflects improving product mix toward higher-margin products, augmented by two compelling acquisitions – HeRO and DFINE – and the Cook Medical catheter recall; shifting production to lower-cost locales; transitioning certain markets outside the U.S. from distributors to a direct sales model; and realignment of internal incentives to emphasize gross margin improvement.

“We model 16% year-over year revenue growth in the second half this year and 10% in 2017,” he said. “What’s more, if the firm delivers revenue upside (which we think is possible), it would most likely come from higher-gross margin products, which would boost our gross margin thesis,” he added.

Mr. Mills said he is optimistic the firm is on the cusp of accelerating revenue growth, material margin expansion and stronger earnings growth, which should portend share appreciation, perhaps not only to the $27 year-end price target but possibly higher if multiple expansion ensues.