TransMedics Group TMDX is a key player in transforming organ transplant therapy for patients with end-stage lung, heart and liver failure. The company offers Organ Care System, an integrated, compact, portable preservation technology that addresses unmet need for organs for transplantation. However, with a forward 12-month price-to-sales (P/E) ratio of 5.02X — above the Zacks Medical - Instruments industry average of 4.44X — there are concerns about the justification of TransMedics’ premium valuation in the current market.

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TransMedics’ Underwhelming Three-Month Performance

One of the main red flags for investors is TransMedics’ underperformance in 2024. In the past three months, TMDX’s shares have lost 52.3%, lagging the Medical – Instruments’ decline of 4% and the S&P 500’s gain of 7.1%.

The contrast is even more striking compared to top competitors like Paragon 28 Inc FNA and Tactile Systems TCMD, whose shares have surged 41.4% and 22.2%, respectively. This relative weakness suggests that TransMedics may not keep pace with broader market trends or its peers.

Three-Month Performance

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Weak US Transplant Market

Although TransMedics reported 64% growth in revenues during the third quarter, driven by rising utilization of the Organ Care System, the metric fell short of expectations by 4.8%. The company’s earnings per share (EPS) of 12 cents missed market expectation by 57.1%. The below-market top and bottom-line performances were primarily caused by softer-than-anticipated season in the U.S. transplant market. TMDX has been registering declining volumes in the past few quarters, reflecting the softer trend in the market.

The company has maintained its full-year guidance for revenues at $425-$445 million, even after lower-than-expected sales. This is because it expects the softer trend to recover soon. However, investors seemed concerned that strong market share gains last year may decline going forward. TMDX’s gross margin contracted 500 basis points to 56% during the third quarter compared with the prior-year quarter. The contracting gross margin reflects rising costs that are likely to continue in the upcoming quarter.

With a new President taking office next year in the United States, several key personnel changes may occur, including a shift in leadership in the U.S. Health and Human Services Department. Any change in regulations regarding healthcare benefits, practices and costs in the United States could affect the firm’s future sales, profit margins and share price.

The Zacks Consensus Estimate for 2024 earnings is currently pegged at $1.00 per share, indicating almost 230% year-over-year improvement. However, the estimate have declined 18% over the past 60 days.

Declining Estimates Over 60 Days

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TMDX May Gain From Competitive Advantage

There are several players in the organ transplant field and others are also looking to enter it. Recently, Sweden-based Getinge acquired the U.S.-based transplant specialist, Paragonix. Paragonix’s technology has added pumps to help improve the quality of organ preservation and it uses the more limited cold storage science. Another player, Sweden-based Xvivo has developed a portable warm liver support technology.

However, TransMedics enjoys a competitive advantage over existing players. The company’s warm physiologic portable technology that addresses the heart, lungs and liver gives it a major advantage with further-flung organ donors. TMDX is also planning to launch its own OCS cold perfusion technology for the heart to gain further edge over its competitors. Moreover, Xvivo’s six-hour support for liver storage is significantly lower than TransMedics’ 24-hours support. Xvivo also lags significantly in storage of heart and lung as well.

These competitive advantages are likely to help the company ward off recent softness in the market as well as gain market share faster than its competitors.

Wrapping Up

TMDX currently carries a Zacks Rank #3 (Hold). Moreover, the style scores don’t look quite promising. The company has a Value and Momentum score of D and a Growth score of B. As such, we believe that investors should not make any new investment in the stock at present. However, current shareholders should continue to hold their position as TMDX’s shares are likely to recover once the softness in demand improves. Moreover, TMDX’s stock valuation is below its five-year median valuation, reflecting undervaluation. Investors should focus on top-line growth, especially its services revenues, and any improvement in gross margin going forward.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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