WB downgrades EndoChoice to market perform

William Blair downgraded EndoChoice Holdings (NYSE:GI) to “market perform,” citing lower-than-expected second quarter results and reduced guidance. The stock closed at $5.26 on Wednesday.

“While we continue to view EndoChoice’s Fuse system as a disruptive technology that can and should be a large player in the $3-billion endoscopy tower market over time, results over the last several quarters suggest the process to convince physicians to switch from the large incumbent manufacturers is taking longer than expected,” writes analyst Margaret Kaczor.

While the single-use products business provides a relatively stable base of revenues for EndoChoice, she said company gross margins and profitability, along with cash burn, are highly levered to the success of scaling Fuse.

She said the downgrade reflected this slower-than-expected adoption rate of Fuse, limited visibility to a turnaround in the near term in a volatile capital equipment market, and funding risk for the business over the next two years.

At 1.3 times her 2017 sales estimate of $90.1-million, reflecting 14% growth year-over-year, shares of EndoChoice trade in line with other capital equipment businesses and mature disposables businesses.

“While we believe the business can reaccelerate over time, we believe the company will remain in the penalty box until there are durable signs that adoption of Fuse is reaccelerating and we receive better visibility on cash requirements,” Ms. Kaczor added.


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