We maintain our Neutral recommendation for Greatbatch Inc. (GB). Revenues and earnings for first-quarter fiscal 2011 topped the Zacks Consensus Estimates, buoyed by solid double-digit growth across the company’s Vascular Access, Orthopedic and Electrochem franchises.
The company’s Vascular business (sales climbed 28% in the quarter) is benefiting from higher introducer sales and favorable ordering trends while a rebounding orthopedic market is contributing to growth in its Orthopedic (up 34%) franchise.
Moreover, Greatbatch’s Electrochem business, which had struggled in fourth-quarter 2010, had a strong turnaround in the first quarter, helped by customer inventory rebuilds.
However, the healthy results were partly ebbed by a still weak CRM business. The sluggish revenue growth (up 1%) in this business in the first quarter reflects sustained pricing pressure and general softness in the market.
Greatbatch has generated solid operating cash flows in the first quarter. The company expects to continue using cash flows to deleverage its balance sheet and meet R&D requirements.
Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company has been acquiring complementary businesses over the last few years to boost sales. Moreover, Greatbatch’s pipeline is healthy with a number of products currently in development that are expected to support growth in the long run.
The company, in 2010, extended its tie-up with St. Jude Medical (STJ), which has provided it an exclusive supplier status of filtered feedthroughs (used in CRM devices) through 2017. Moreover, Greatbatch, in February 2011, inked a five-year deal with Boston Scientific (BSX).
We feel that improving trends across the orthopedic and vascular markets should boost operating results moving forward, supported by a resurgent Electrochem business. Moreover, synergies from cost-cutting and restructuring initiatives are expected to support margin expansion.
However, a soft CRM market may prove to be challenging for the company in 2011. We are also cognizant of the pricing headwind.
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