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Needham says it expects growth in the orthopedic device market to slow later this year, but sees Enovis (NYSE:ENOV) and Paragon 28 (NYSE:FNA) as being able to beat the trend.
The investment bank said it expects market growth for the products to slow to 4% to 5% for 2024 and beyond. In comparison, 2023 saw growth of 7%, the highest rate in over ten years, save for a pandemic “bounce back” in 2021.
Needham attributed last year’s robust gains to pandemic-related backlog, improved pricing, enabling technologies, and new launches driving product mix.
“In our view, the procedure backlog and pricing are not sustainable,” wrote the analysts in their note. “However, we think the mix effect and enabling technologies are likely to last longer.”
Needham said that after attending the annual meeting of the American Academy of Orthopaedic Surgeons, or AAOS, earlier this month, it is favoring Enovis (ENOV) and Paragon 28 (FNA), given their new product launches and “attractive” valuations.
Enovis stock has been on the upswing since early January, climbing 12% year-to-date as of Feb. 25, thanks in part to its recent acquisition of Lima for around $1B and a Q4 earnings report that beat the Street. Needham put the stock on its 2024 convictions list in December.
“We expect ENOV’s new product launches, orthopedic market strength and the Lima acquisition to drive upside to consensus in 2024,” the Needham analysts commented.
Other firms such as Stephens are also bullish on the stock. Of the 12 analysts tracked by SA who cover Enovis, 9 rated the stock a strong buy, 2 a buy and 1 a hold. The stock’s Quant score is currently a buy, despite earning a D in valuation.
Paragon 28 is another Needham favorite, with the firm citing the company’s new bunion-focused products and supply chain improvements, along with continued sales force expansion and surgeon training. Needham added that its believe Paragon 28 “can return to its historical roughly 20% revenue growth in 2024.”
Paragon 28’s stock is up 7% year-to-date, helped by a positive preliminary revenue report issued in early January. The company is slated to release its Q4 report on Feb. 29.
Of the 7 analysts tracked by SA who cover Paragon 28, 4 have rated it a strong buy and 3 a buy. The stock’s Quant rating is currently a hold, however, due in part to a D in valuation.
Needham also maintained its buy rating on CONMED (CNMD) and hold ratings on Zimmer Biomet (ZBH) and Stryker (SYK).
Other leading makers of orthopedic devices include Johnson & Johnson (JNJ), Medtronic (MDT), Smith + Nephew (SNN), Globus Medical (GMED), Orthofix (OFIX), and ZimVie (ZIMV).
