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Thoratec Corp. (THOR - Analyst Report), a leader in mechanical circulatory assistance devices, reached a 52-week high on December 12 and became a Zacks #1 Rank (Strong Buy) on November 20. The company has reported positive earnings surprises in five of the last six quarters with an average beat of 15.6%. In its most recent report, THOR enhanced its revenue and EPS guidance for the year.

Strong Third Quarter

On November 1, Thoratec reported third quarter adjusted earnings per share of 44 cents, surpassing the Zacks Consensus Estimate by 33.3% and the year-ago earnings by 29.4%. Net income from continuing operations soared 27.7% year over year to $24.3 million.

Revenues improved 15% year over year to $117.8 million, beating the Zacks Consensus Estimate by 5.4%. The improvement was based on higher volume of the HeartMate II product line (up 27% year over year), as well as the development of Destination Therapy (DT) in the domestic market. Geographically, domestic sales surged 16% year over year to $97.5 million while overseas revenues increased 9% to $20.3 million.

HeartMate sales jumped 21% to $105.9 million. Thoratec pump sales were up 17.7% year over year to $85 million while non-pump revenues advanced 8.1% to $32.2 million. Unit sales of pumps in the U.S. increased 17.4% to 781 units, while overseas sales were up 10.6% to 208 units.

On an adjusted basis, gross margin decreased to 71.4% from 71.6% in the prior-year quarter on account of foreign currency fluctuations.

Improved Guidance

Thoratec now expects revenues between $477 million and $483 million for 2012, compared with the prior guidance range of $460 million to $470 million. The updated guidance includes higher sales estimates for the HeartMate II product line and solid expansion of the ventricular assist device (VAD) market.

For 2012, earnings per share (on a reported basis) are now projected in the range of $1.40 to $1.44, compared to the prior guidance of $1.28 to $1.34, while adjusted earnings are expected between $1.79 and $1.83, compared with the prior guidance of $1.67 to $1.73.

Earnings Estimates on the Rise

All four estimates for 2012 have been revised higher in the last 60 days, which has boosted the Zacks Consensus Estimate by 8.1% to $1.61. This represents earnings growth of 16.5%.

All four estimates for 2013 have also been revised upward in that time, raising the Zacks Consensus Estimate by 5.1% to $1.66, reflecting an implied growth rate of 3.4%.

Recent Developments>

On December 11, 2012, Thoratec revealed that it was granted approval by the Japanese Ministry of Health, Labour and Welfare to commercialize HeartMate II for bridge to transplantation (BTT) purposes for victims of advanced heart failure.

HeartWare International Inc. (HTWR), a global provider of miniaturized VAD for advanced heart failure, disclosed on November 20 that the U.S. Food and Drug Administration (FDA) has granted clearance for its HeartWare Ventricular Assist System as a bridge to heart transplantation device for patients with end-stage heart failure. However, there is no imminent competitive threat for Thoratec from HeartWare in the DT segment, as the product from the latter is not expected to be launched in the immediate future. We believe that DT will account for the major part of growth in the VAD market.

Stretched Valuation

Thoratec trades at a premium to its peers by most metrics, such as price-to-earnings and price-to-book. The stock is currently trading at a forward P/E of 24.4, an 18.7% premium to the peer group average of 20.6. The price-to-book of 3.4x is marginally higher that the peer group average of 3.3x. The trailing twelve-month return on investment of 14.9% is slightly lower than the peer group average of 15.8%.

Thoratec’s price performance has been fairly strong. The stock is currently trading above both its 50- and 200-day moving averages. Thoratec has rallied 26.5% over the past year compared with a 13.8% increase of the S&P 500.

Based in Pleasanton, California, Thoratec manufactures and sells a wide range of mechanical circulatory assistance devices to meet the clinical requirements of victims of advanced heart failure. Its product range includes Thoratec VAD and HeartMate LVAS (Left Ventricular Assist System). The company has a market cap of $2.31 billion.


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