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On Jul 8, we retained Hanger Inc. (HGR - Analyst Report) at Neutral, following its solid first-quarter 2013 results. In spite of the upbeat performance, we remain on the sidelines given the uncertain healthcare environment.

Why the Retention?

Hanger’s adjusted earnings of 28 cents per share for the first quarter surpassed the Zacks Consensus Estimate by 12%. Profit of this orthotic and prosthetic (O&P) company grew 10.5% to $9.5 million (or 27 cents a share), primarily led by strong sales and accretive acquisitions.

Revenues increased 7.1% year over year to $233.5 million in the quarter, marginally beating the Zacks Consensus Estimate of $233 million. It led to record sales of above $1 billion for the company, trailing 12 months. While, the core Patient Care segment is growing on the back of increased same-center sales, the Distribution business is facing headwinds in the form of unfavorable weather and tough year-over-year comparisons.

The company’s earnings have also managed to beat the Zacks Consensus Estimates in the last 4 quarters with an average surprise of 5.87%. Following the earnings release, the Zacks Consensus Estimate for 2013 has moved up by 1.5% to $2.09 per share. For 2014 too the Zacks Consensus Estimate increased significantly (up 3.9% to $2.40 per share).

Hanger enjoys a sovereign position in the orthotic and prosthetic (O&P) market and continues to gain market share. The company is focusing on expanding its geographical footprint and revenues through complementary acquisitions. In addition, to derive better results from its market strategy from 2013, the company realigned its reporting segments.

However, Hanger remains affected by a host of macro issues including sequestration, and measures (including Medicare and Medicaid reimbursement cuts) adopted by the state governments to cover budget deficits. Moreover, the impact of the medical devices tax is pressurizing the company’s margins. These factors are apprehended to weigh on Hanger’s results going forward.

Other Stocks to Consider

Other large-cap medical products companies such as Resmed (RMD - Analyst Report), Essilor International SA (ESLOY) and Edwards Lifesciences Corp. (EW - Analyst Report) are expected to do well in the medical industry. All these stocks carry a Zacks Rank #2 (Buy).

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