We reiterate our Neutral recommendation on
) following its second quarter results. In the reported quarter,
adjusted earnings per share of 43 cents were in line with the Zacks
Revenues grew 14% year over year to a record $166.5 million in the
quarter, beating the Zacks Consensus Estimate of $162 million.
However, reported profit plunged 55% year over year to roughly $3.9
million (or 16 cents a share) due to higher operating expenses in
the Orthopedic division.
Greatbatch has been registering solid double-digit growth in its
Vascular business, leading to top-line expansion. Growth in the
underlying markets coupled with market share gains is contributing
to higher revenues from the Vascular business. New product launches
and commercialization of medical devices from the QiG group are
expected to further boost revenues in the future.
Moreover, the recent acquisition of Micro Power has provided
opportunities to diversify the Electrochem business by expanding
its foothold in the portable medical battery market and stimulating
growth in other key areas. The acquisition started to contribute
meaningfully to the company's top line in 2012 and is expected to
be accretive to earnings starting 2013.
In addition, Greatbatch has been investing heavily in research and
development (R&D), to establish itself as a provider of
complete medical devices systems. The QiG Group, under the Vascular
business, is developing nearly a dozen new medical devices in
collaboration with its Original Equipment Manufacturing ("OEM")
partners. The group is also independently working on four medical
devices, the most notable of which is the Algostim spinal cord
stimulator for chronic pain treatment in trunk and limbs.
Further, the company recently opened its first R&D center in
Singapore to develop cost-effective active implantable medical
devices. This is also the first step for the company to gain access
into emerging markets, especially the Asia-Pacific region.
However, Greatbatch's European Orthopedic business has been
experiencing operational headwinds mainly due to manufacturing and
product development difficulties. It led to delayed shipments and
canceled orders, which in turn is hurting Greatbatch's margins and
profitability. The company is now expecting operating income and
earnings towards the lower end of its 2012 guidance.
Furthermore, the CRM/Neuromodulation division has been hit by a
number of factors including pricing pressure, customer inventory
adjustment and economic softness. Revenues from this business are
expected to remain under pressure moving forward, as reflected in
the company's guidance for 2012.
However, quite unexpectedly, and despite macroeconomic headwinds,
the division is showing signs of improvement on the back of new
product launches. We believe that focused sales and marketing
initiatives along with sustained product development opportunities
will drive the company to achieve its full-year CRM sales guidance.
Greatbatch is a leading producer and supplier of batteries,
capacitors and components used in implantable medical devices. The
company's top customers include
Johnson & Johnson
St. Jude Medical
). We currently have a Neutral recommendation on Greatbatch, which
carries a short-term Zacks #4 Rank (Sell).
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