We upgrade our recommendation for Greatbatch Inc. (GB) to Neutral following its mixed fourth-quarter fiscal 2010 results. Earnings for the quarter topped the Zacks Consensus Estimate on the heels of solid growth across the company’s Vascular Access and Orthopedic franchises.
The New York-based company swung to profit in the fourth quarter, in part, attributable to a $9.5 million gain associated with the settlement of litigation on its Electrochem unit. Sales climbed 6% year over year, yet missed the Zacks Consensus Estimate, affected by unfavorable currency exchange translation.
We feel that improving trends across the orthopedic and vascular markets should boost operating results moving forward. A rebounding orthopedic market catalyzed a 22% growth in Orthopedic revenues in the quarter while Vascular Access sales zoomed 29% riding on higher introducer sales. However, this was partly masked by a sluggish Electrochem division with revenues clipping 17% year over year.
Greatbatch has generated solid operating cash flows (up 30% year over year) during 2010, which have helped it repay debt worth $78.5 million. Greatbatch 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. Greatbatch’s pipeline is healthy with a number of products currently in development that are expected to support growth in the long run.
Greatbatch, 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, the company recently inked a five-year deal with Boston Scientific (BSX).
Moving forward, operating results will be supported by the rebound across the Orthopedic and Vascular operations. Also, Electrochem sales are expected to normalize in first-quarter fiscal 2011. Moreover, synergies from cost-cutting and restructuring initiatives as well as better sales mix are expected to boost margins.
However, a soft CRM market may prove to be challenging for the company in 2011. We are also wary about the foreign exchange headwind and pricing pressure. Our recommendation on the stock is backed by a Zacks #3 Rank (Hold).
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