Symmetry Reiterated at Neutral

We are maintaining our Neutral rating on Symmetry Medical (SMA - Analyst Report) following its mixed first-quarter fiscal 2011 results.

Earnings for the quarter missed the Zacks Consensus Estimate by a penny while profit dropped 13% year over year on account of facility consolidation and management transition charges, as well as employee severance payments.

On a positive note, revenues for the instrument supplier to orthopedic device makers jumped roughly 13% year over year in the quarter, beating the Zacks Consensus Estimate. Sales were boosted by higher customer shipments across the Indiana-based company’s instruments and surgical cases businesses. Healthy double-digit growth in surgical instruments and cases revenues were, in part, masked by a decline in the orthopedic implants business.

Charges associated with facility consolidation, management transition and severance payments led a decline in operating margin in the quarter. The company reaffirmed its revenues and earnings guidance for fiscal 2011.

Symmetry is the largest OEM provider of orthopedic implants and instruments to orthopedic device manufacturers. Its major customers include Johnson & Johnson’s (JNJ - Analyst Report) DePuy, Stryker (SYK - Analyst Report) and Zimmer Holdings (ZMH - Analyst Report).

The company has created a distinct competitive niche in the orthopedic devices market with its “Total Solutions Approach”, providing a substantial growth opportunity. Most of its customers are expanding outsourcing, realizing the benefits of a “One-stop shop” solution that allows them to focus their efforts on marketing and R&D.

Symmetry has adopted a three-pronged strategy to tackle economic challenges by preserving cash, developing an extensive supply chain and focusing on bottom line improvement. Moreover, the company has diversified its offerings into areas outside of orthopedics, such as dental, osteobiologic and endoscopy.

Symmetry is investing in revamping its management structure and enhancing customer collaboration, which should push growth moving forward. The company should benefit from higher demand for its solutions as its major customers ramp up spending and accelerate product launches.

However, Symmetry still faces price and procedure volume headwinds in the orthopedic space. Also, the company’s high spending may continue to weigh on its bottom line. Our recommendation on the stock is in agreement with the short-term Zacks #3 Rank (Hold).