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We reaffirm our Neutral rating on orthotic and prosthetic (O&P) company Hanger Orthopedic (HGR - Analyst Report) following its second-quarter fiscal 2011 results. Adjusted earnings of 45 cents met the Zacks Consensus Estimate while profit zoomed 58% year over year owing to the combined impact of higher sales and lower relocation charges.

Revenues continue to climb at a double-digit pace, boosted by higher sales from the company’s therapeutic solutions business, powered by the acquisition of rehabilitation technologies provider Accelerated Care Plus (“ACP”). However, sales (of $234.8 million) missed the Zacks Consensus Estimate.

The company maintained its revenues and earnings forecasts for fiscal 2011. It is optimistic about posting sequentially higher sales over the remaining quarters of fiscal 2011.

Hanger leads in the O&P patient care services market, operating through more than 675 patient care centers across the U.S. The company’s economies of scale are unmatched by its competitors which include notable players in the O&P space such as Orthofix International (OFIX - Snapshot Report), Conmed Corp. (CNMD - Analyst Report), Exactech Inc. (EXAC - Snapshot Report) and Owens & Minor Inc. (OMI - Snapshot Report).

Hanger is enjoying healthy demand for its services. Linkia (one of Hanger’s four business units) remains a significant growth engine for the company. Linkia, the company’s network management wing, continues to expand its relationship with national and regional insurance companies.

Hanger continues to explore acquisitions to boost its geographic presence. The company’s $155 million acquisition of ACP in December 2010 has added a fresh avenue of growth. Hanger anticipates the transaction to be accretive in 2011.

Moreover, the company recently acquired five companies with consolidated revenues of roughly $20 million. Hanger has funded these acquisitions from internally generated cash flows.     

Hanger has substantially completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas. The company is poised to achieve meaningful cost synergies from its corporate relocation.

Another significant growth catalyst represents broader reimbursement coverage for its electrical stimulation device WalkAide. Moreover, the company has launched a pediatric version of WalkAide to be used by children with cerebral palsy.

We remain impressed by Hanger’s ability to post top line improvement at a healthy quarterly run rate. However, we are cautious about the company’s exposure to reimbursement uncertainties and its aggressive acquisition strategy which has inherent risks.

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