Is Merge Healthcare A Buy After Strong Q3 Results?

On Dec 5, 2014, we issued an updated research report on Merge Healthcare Incorporated MRGE. Merge posted yet another quarter of improved performance with revenues sailing past the Zacks Consensus Estimate and the bottom line improving on a year-over-year basis.

Adjusted earnings per share came in at 4 cents, a significant surge from a penny earned in the year-ago quarter. On the other hand, although pro forma revenues declined 6.1% to $54.2 million, the top line steered ahead of the Zacks Consensus Estimate of $53 million.

We are encouraged by the fact that the subscription-based model is gaining traction as reflected in the healthy growth of subscription backlog. It is also commendable that despite the general slowdown in hospital spending, low demand for imaging equipment and related technology due to global credit crisis and macroeconomic factors, Merge witnessed client wins and bookings growth. The huge market opportunity for its iConnect and eClinical platforms is also encouraging.

We believe that the company has immense potential in the diagnostic imaging market, especially with the government emphasis on HCIT and demographic tailwinds. In our opinion, Merge is well positioned to take advantage of this opportunity over the long term.

However, we are wary about declining Medicare reimbursement for advanced medical imaging that could negatively affect hospital and imaging clinic revenues, thereby reducing demand for imaging-related software and services offered by Merge. Moreover, the company's growth prospect is highly dependent on capital investments by hospitals for advanced imaging solutions, which are in turn tied to general economic conditions. Moreover, falsification of the company's subscription backlog in its eClinical business continues to raise negative sentiments.

Merge currently carries a Zacks Rank #2 (Buy).

Other Stocks to Consider

Investors interested in the broader medical sector can also consider stocks like ICU Medical, Inc. ICUI, OraSure Technologies, Inc. OSUR and Amedisys Inc. AMED. All the three stocks carry a Zacks Rank #1 (Strong Buy).