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We upgrade our recommendation on Greatbatch (GB - Analyst Report) to Outperform following its impressive third-quarter 2011 results. Adjusted earnings of 41 cents for the quarter outstripped the Zacks Consensus Estimate of 34 cents. Profit surged 17% year over year. Sales rose 3% year over year to $131.7 million, matching the Zacks Consensus Estimate.

Revenues and profit were boosted by double-digit growth across the company’s Orthopedic and Vascular franchises, which offset the decline in the Electrochem unit. The company backed its revenue and earnings forecast for the full year.

Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company’s top customers include Boston Scientific (BSX - Analyst Report), Johnson & Johnson (JNJ - Analyst Report), Medtronic (MDT - Analyst Report) and St. Jude (STJ - Analyst Report).

Greatbatch has been acquiring complementary businesses over the last few years to boost sales. The company’s pipeline is healthy with a number of products currently under development that are expected to support growth in the long run. Moreover, Greatbatch continues to invest in developing medical devices for its major OEM clients.

Greatbatch remains committed to de-leveraging its balance sheet. The company repaid long-term debt worth $10 million in the third quarter. Greatbatch plans to continue to use its cash flows to fund R&D initiatives and pare debt.

A rebounding orthopedic market, market share gains coupled with customer inventory build-ups and product launches are contributing to growth in the company’s Orthopedic business. Greatbatch expects these factors to continue to boost its orthopedic sales through 2011.

Moving ahead, we feel that operating results will be supported by strength at the company’s Orthopedic business and strategic investments. Moreover, synergies from cost-cutting and restructuring initiatives are expected to support margin expansion.

That said, we remain vigilant about pricing pressure and a still soft CRM market. Our recommendation on the stock is backed by a Zacks #1 Rank, which translates into a short-term Strong Buy recommendation.

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