Canaccord Analyst Recommends Investors to Stay on the Sidelines on Endologix, Inc. (ELGX); Shares Dive 27%

Endologix, Inc. (NASDAQ:ELGX) shares plunged almost 27% today after today’s announcement that the medical-device maker has placed AFX/AFX2 endografts on a temporary shipping hold after discovering a manufacturing issue amid routine internal testing on the product line. From Canaccord analyst Jason Mills‘ perspective, this is a crucial misstep, as this device contributes a huge bulk, of over 60%, to the company’s total revenue.

For Jason, the situation has been relegated “from bad to worse” for the company, whose shipping hold “is the latest in a series of negatively impactful product-related events at the company, all of which further amplify myriad concerns regarding the fundamentals of this business, which we highlighted in our downgrade note in mid-November.

Looking ahead, “We also think ELGX will continue to face fundamental headwinds that could mitigate the probability of a near-term bounce in the stock, including: 1) a low-growth global EVAR market (flat in the US; LSD at best globally, in our view) and 2) ongoing implementation of competitive risk-sharing models (with ELGX’s size negatively positioning the company to compete in the evolving market). Further, while the diversity of ELGX’s current EVAR portfolio (Ovation, AFX2) and robust pipeline (Nellix, Nellix 2, Ovation Alto, Nellix ChEVAS) have been cited by many (including us) as positive aspects of this story, today’s announcement calls into question in our minds the firm’s ability to manage three separate and distinct endovascular systems,” Mills contends.

On the heels of the setback, the analyst reiterates a Hold rating on ELGX while cutting the price target from $7.50 to $6.30, which represents a just under 20% increase from where the shares last closed.

Additionally, Mills pulls back on both his top-line and bottom-line expectations for the fourth quarter of 2016 as well as 2017. For 2016, the analyst reduces his sales estimate from $200.0 million to $197.7 million, with a gross margin assumption cut from 71.2% to 70.9%, anticipating near-term impact to the COGS line in the short-term due to the ship hold.

Furthermore, the analyst now calls for an LPS projection of $(0.71) instead of his prior projection of $(0.70). For 2017, Mills reigns in his top-line forecast from $208.6 million to $204.1 million, as well as his GM assumption from 71.5% to 70.2%. Lastly, the analyst tweaks the bottom-line estimate of his model from $(0.56) to $(0.58).

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, four-star analyst Jason Mills is ranked #520 out of 4,290 analysts. Mills has a 53% success rate and gains 4.5% in his annual returns. However, when recommending ELGX, Mills loses 23.0% in average profits on the stock.

TipRanks analytics demonstrate ELGX as a Buy. Out of 6 analysts polled by TipRanks in the last 3 months, 4 are bullish on ELGX, while 2 maintain a Hold. With a return potential of nearly 88%, the stock’s consensus target price stands at $9.90.

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