We upgrade our recommendation on Hanger Orthopedic (HGR) to Outperform based on our assessment of the company’s forecast-beating fourth-quarter fiscal 2010 results and increased visibility on its business prospects. Earnings for the quarter topped the Zacks Consensus Estimate. Healthy contributions from the company’s patient-care and distribution businesses as well as acquisitions fueled by double-digit growth in revenues, helped beat the forecast.
Hanger is the market leader in the orthotic and prosthetic (O&P) patient care services market, operating through 678 patient care centers across the U.S. The company is enjoying healthy demand for its services. Linkia (one of Hanger’s four business units), the first managed care organization dedicated solely to the O&P market, remains a significant growth engine for the company. Linkia continues to seek contracts with national and regional insurance companies.
Hanger’s economies of scale are unmatched by its competitors which include notable players in the O&P space such as Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI).
To expand its geographic presence, Hanger continues to pursue small tuck-in acquisitions. The company bought three companies (Dynamic Orthotics and Prosthetics of Texas, Nebraska Orthotic and Prosthetic Services, and Spectrum Prosthetics and Orthotics of Iowa) in June 2010 with consolidated revenues of $14 million.
Moreover, it acquired rehabilitation technologies provider Accelerated Care Plus (“ACP”) in December 2010 for $155 million in cash. The acquisition adds a fresh avenue of growth for Hanger and complements its healthcare offerings. Hanger anticipates the transaction to be accretive in 2011. The company is partly funding these acquisitions with internally generated cash flows.
Hanger has nearly completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas. The company is poised to achieve meaningful cost synergies from its corporate relocation in the future reporting periods.
That said, we are also cognizant of Hanger’s aggressive acquisition strategy, which has its inherent risks. Moreover, a potential delay or failure to secure additional third-party reimbursement coverage for the company’s electrical stimulation device WalkAide may dent future growth prospects. Hanger currently retains a Zacks #1 Rank, which translates into a short-term “Strong Buy” recommendation.
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