ZOLL Medical Raised to Outperform

We upgrade our recommendation on ZOLL Medical (ZOLL) to Outperform following its forecast-topping fourth-quarter fiscal 2011 results. Revenues and earnings for the quarter outperformed the Zacks Consensus Estimates driven by strong contributions from the company’s LifeVest and temperature management franchises, backed by higher sales in the North American hospital market.

Revenues from the North American hospital market surged 31% year over year in the quarter on the heels of strong sales from ZOLL Medical’s U.S. military business. The company saw recovery in the North American pre-hospital market with sales climbing 10% in the quarter.

The company’s LifeVest business ended fiscal 2011 on a strong note with revenues zooming 52% in the fourth quarter. Temperature Management business also performed strongly with revenues climbing 35%.

ZOLL Medical is a leading player in the global market for external defibrillators, which is worth more than $1 billion. The company is the innovator of a wide range of product features that have become the standard of care in the external defibrillator industry. ZOLL Medical operates in a highly competitive U.S. defibrillation market and competes with Physio-Control, a wholly owned unit of Medtronic (MDT - Analyst Report), and Philips (PHG - Analyst Report).

To boost growth, ZOLL Medical is expanding its footprint in the international markets. Its international sales soared 24% in the fourth quarter. Moreover, ZOLL Medical remains committed to expanding its product range to sustain growth in the U.S. defibrillation market.

LifeVest remains the cornerstone of ZOLL Medical’s growth story. The device has been already prescribed to over 50,000 patients (at high risk of sudden cardiac arrest) and all the top hospitals in each of the 52 metropolitan areas in the U.S. Moreover, the company’s Propaq MD defibrillator and the Propaq M heart monitor represent a major boost for its military-focused business.

We are pleased with ZOLL Medical’s solid fundamentals and believe that its wide product range coupled with expansion initiatives should push growth moving forward. Similar to LifeVest, the company’s temperature management business is emerging as a meaningful contributor to sales and margins.

Management’s outlook for fiscal 2012 appears encouraging with sales expected to grow at a healthy double-digit clip on the strength of the company’s core defibrillator business.

However, we are cautious about the sluggish capital spending environment. ZOLL Medical currently retains a Zacks #3 Rank, which translates into a short-term “Hold” recommendation.