We recently reiterated our Neutral recommendation on Kinetic Concepts Inc. (KCI), with a target price of $53.
Kinetic reported an adjusted EPS of $1.17, beating the Zacks Consensus Estimate of $1.15 and the year-ago quarter’s earnings of $1.10. Net sales of the company were almost in line with the Zacks Consensus Estimate and the year-ago quarter’s $527 million with a 5.5% decline in rental income to $288.5 million. A 2.3% revenue growth in the North American market was offset by a huge 7.1% decline of the EMEA/APAC market due to unfavorable currency movements.
In its outlook for fiscal 2011, the company expects adjusted EPS of $4.45-$4.61 (representing growth of 4%-7%) on revenue of $2.05-$2.09 billion (2%-4%). This was based on its strong growth of LifeCell business as well as the launch of new Active Healing Solutions (AHS) products.
In the reported quarter, Kinetic witnessed stabilization in the US V.A.C. business (within the AHS segment) banking on the latest V.A.C. Therapy product. Also, the Prevena incision management system has been launched globally. Moreover, Kinetic is focusing on the surgical wound management market.
The company is in a continuous process to develop and commercialize the AHS products. Its recent agreement with Wright Medical to use the ‘Graftjacket’ brand name in V.A.C. business is expected to boost the sales. Moreover, in LifeCell business, Kinetic’s robust performance was on the back of the success of ‘Strattice’ and ‘Alloderm’ in the area of challenging hernia repairs.
The company has entered into the Japanese market with its core V.A.C. Therapy products and related disposables and expects to generate revenues of more than $20 million in 2011. Also the company has begun looking for several opportunities aggressively to build up appropriate networks to launch NPWT (Negative Pressure Wound Therapy) products in other emerging markets in near future. In the Regenerative business, Kinetic launched Strattice in eleven European countries including the UK and Germany.
However the company’s business outside North America suffered due to unfavorable competitive pricing and lower sales volumes in highly price sensitive and competitive markets driven by European governments austerity measures in response to a challenging economic environment.
Also the recent earthquake, followed by a colossal tsunami is expected to be a major blow on Kinetic’s V.A.C market in Japan. Also, we are apprehensive about the patent litigation with Smith & Nephew (SNN), challenging economic environment and competitive landscape.
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