Volcano Rises On Strong Q2, Bullish Analyst Buzz

Shares of Volcano (VOLC) were up 8% in afternoon trading, following the company's better-than-expected second-quarter earnings report and a spate of positive analyst commentary.

The medical device company said it earned 3 cents a share, whereas analysts were expecting a one cent per share loss. Revenues of $101.3 million also topped consensus estimates of $97.9 million.

Volcano also issued mixed guidance for the full year, saying it expects to earn between 3 and 5 cents a share on revenue of $394 million to $400 million. Analysts are modeling for earnings per share of a nickel on $395.8 million in sales.

Analysts were also largely positive about the quarter. Canaccord Genuity's Jason Mills and Jeffery Chu upgraded the stock from Hold to Buy and boosted their price target by $5 to $26 on the news. "Solid or improving revenue growth trends and margin expansion are tried and true drivers of small-cap med-tech multiples. However, since October 2010, VOLC has lost over 20% of its value amid declining growth (admittedly from a high level) and inconsistent gross margin performance, which drove multiple contraction to its current discount relative to the broad comp group. However, improving trends in the core IVUS business, easing Y/Y comps, strong margin expansion potential via manufacturing transition to Costa Rica in 2014, and several catalysts on the horizon (e.g., new products, clinical data), portend a more favorable risk/reward profile in the stock at current trading levels."

Raymond James analyst Jayson Bedford reiterated an Outperform rating on the stock and boosted his target price by $1 to $25. "A re-acceleration to double-digit constant currency growth and guidance that was maintained should help improve investor sentiment. At 2.5x EV/Sales, we do not believe investors are giving Volcano credit for its 9-11% top-line growth profile, with visibility into 70% gross margins. Additionally, we expect investor enthusiasm to increase in 2014 due partially to an emerging pipeline of new products and, potentially, a less volatile U.S. PCI market."

Oppenheimer analysts Steven Lichtman and Rosemary Liu reiterated their Outperform rating and $24 price target. "Recent pipeline introductions (iFR, new Verrata Pressure Guide Wire) are building momentum though not yet meaningfully impacting in 2Q. While certainly encouraged by improving PCI trends, management is conservatively adopting a wait-and-see approach and has reiterated full-year guidance for sales/GM/opex. Overall, an impressive quarter and an important step toward reaccelerating top/bottom-line growth."

J.P. Morgan analyst Christopher Pasquale reiterated an Overweight rating and increased his target price by $3 to $29. "While some investors may discount the magnitude of the beat given low expectations coming off of a below trend 1Q, Volcano's strength this quarter was broad based and we believe that the 10% top-line growth the company demonstrated during the first six months of the year should be sustainable over the balance of 2013. With increased confidence in near-term numbers, we expect investor focus to shift back to Volcano's long-term growth potential. For our part, we continue to see the company as a compelling growth reacceleration story over the next 12-24 months, with little in the stock today for this bull case.