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Upgrading Hanger Ortho to Buy
First quarter EPS doubled on lower variable interest rate expense. Sales grew 9.6%, driven by strong patient care center growth. Operating margin gained 40 basis points due to higher gross margins and lower sales, general and administrative (SG&A) expenses. Effective tax rate declined 160 basis points to 40%. Hanger Orthopedic Group, Inc. (HGR - Analyst Report) guided 2008 EPS higher by five cents to $0.75-$0.77.
The company produced better-than-expected first quarter results, helped by strong 26% growth in distribution and a lower variable interest rate on debt. The sales growth was due to a $5.5 million or 4.2% increase in same-center sales in patient care business, a $3.4 million or 25.7% increase in outside sales of the distribution segment, and a $4.9 million increase from acquired entities.
The increase in SG&A was due to acquisition-related expenses, investment in growth strategies, and higher merit salaries and fixed overhead expenses. Importantly, another Medicare fee increase of will help 2008 results.
We are raising our estimates on the out-performance, and our 2008 EPS estimate is in-line with the company's range, two cents above our prior estimate. We believe the company should trade in-line with comparables.
Our target moves to $16, or roughly 21x our expected 2008 EPS of $0.76, in-line with the industry 1.3x median P/E/G and comparables 1.5x 2008 P/E/G average. We are changing our rating to a Buy based upon valuation, strong fundamentals, and the company s industry leadership position.
Read the full analyst report on HGR.
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| Market Summary | Jul 31, 2010 13:31 pm ET |
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