As of the end of last week, 310 S&P 500 members have reported their Q1 results, representing 85.3% of the sector’s total market capitalization on the index. While to our great disappointment, we have seen that total earnings for these index members are down -7.2% year over year on -2.4% lower revenues, here is some real good news for investors keen on the Medical sector.

So far, more than 60% of the Medical sector index members have released their first-quarter financial numbers, out of which 78.1% have reported better-than-expected earnings performance on revenue beat of 68.8%. Accordingly, earnings were up 6.3% year over year on an 11.8% revenue growth rate.

While the global economic hullabaloo has been seen to hit the economy hard, leaving the conventional heavyweights like Finance, Tech, aerospace or oil/energy in a position to pull the industry-wide average expectation down, this stupendous first-quarter performance by the Medical sector is something investors definitely need to muse on.

Beaming Medical Device Space

In fact, if we eliminate major drug and biotech stocks from Medical, which are currently entwined in pricing and prescription drug affordability related issues, this space confined mostly by medical device stocks indeed lends a lot of optimism. A recent EvaluateMedTech World Preview claims that the medical device space is positioned for impressive growth in the near term. At a glance, worldwide, medical device sales are expected to grow at a CAGR of 4.1% to $477.5 billion by 2020.

Needless to say that the factors like the recent exemption of the Medical Device Excise tax for the next two years came in as a much-needed breather for these Medical device stocks. This dreadful tax, which was commonly referred to as “fund of the Affordable Care Act (ACA)”, simply took a toll on the entire medical device industry, since its enactment in 2013.

Data published in a report in FierceMedical Device stated that in 2014, Johnson & Johnson made a payment of $180 million in medical device tax payments, while Medtronic (MDT), legacy Covidien and Smith & Nephew (SNN) paid $112 million, $60 million and $25 million, respectively.

We believe this exemption, albeit temporary, has boosted the positive sentiment in the medical device investment world, as most analysts believe it to be adequate for companies to address pressing issues such as a lack of opportunity for research and development, innovation, pipeline development, and to make investments needed to accelerate patient and provider access to innovative health care products.

Apart from that, the strong product cycle and consistent innovation across different markets have continued to remain the major growth drivers in the medical device subsector.

Making the Right Choice

With a wide number of stocks in the medical device sector that almost always muddle up one’s stock-picking prowess, the Zacks methodology could offer some relief. One can narrow down choices by focusing on stocks that sport the desirable combination of a positive Earnings ESP and a favorable Zacks Rank – Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold).

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.
Going by this criterion, we hereby present three medical device stocks that are poised to beat estimates this quarter.

Becton, Dickinson and Company (BDX - Analyst Report)

Popularly known as BD, this global medical technology company has an innovative product pipeline, which is a key catalyst in our view. A set of FDA approvals in the last quarter has added products like TotalysMultiProcessor and TotalysSlidePrep instruments, FACSPresto system and FACSPresto CD4/Hb Cartridge and Vacutainer UltraTouch Push Button Blood Collection Set to the company’s ever-expanding product portfolio.

Meanwhile, BD’s expansion into overseas markets, particularly the emerging markets, is a major positive. Moreover, the CareFusion merger has opened up significant growth opportunities for the company. Further, the combined manufacturing footprint and operations, along with lower overhead expenses should result in significant cost savings.

BD will report its second-quarter fiscal 2016 results on May 5. The stock boasts an Earnings ESP of +1.99%, coupled with a Zacks Rank #2.

Cardica Inc. (CRDC - Snapshot Report)
Cardica develops proprietary stapling and anastomotic devices for cardiac and minimally invasive surgical procedures. The company’s product portfolio facilitates minimally invasive and robot-assisted surgeries. Cardica’s MicroCutter XCHANGE 30 has been manufactured and cleared for use in the U.S. for transection and resection in multiple open or minimally invasive urologic, thoracic and pediatric surgical procedures, as well as application for transection, resection and/or creation of anastomoses in the small and large intestine, and the transection of the appendix.

Cardica will report third-quarter fiscal 2016 results on May 5 after the market closes. We believe the company is poised to beat the Zacks Consensus Estimate given its Zacks Rank #2 and an Earnings ESP of +4.26%.

Quality Systems Inc. (QSII - Analyst Report)

Headquartered in Irvine, CA, Quality Systems Inc is a developer and marketer of healthcare information systems. The company continues to focus on growing its presence in the RCM, population health and interoperability solutions markets. Continuing investments in research & development will help Quality Systems to penetrate these markets, going forward. The latest acquisition of HealthFusion will enable the company to enter the small physician segment. It will also boost the company’s share in the ambulatory market.

Quality Systems is expected to report its fourth-quarter fiscal 2016 numbers on May 19. We expect the company to beat our fourth-quarter earnings estimates as it has a favorable combination of a Zacks Rank #2 and an Earnings ESP of +6.25%.