SurModics Upped to Outperform

We recently upgraded SurModics Inc. (SRDX - Analyst Report) to Outperform from Neutral with a target price of $17.00.

We are pleased with SurModics’ move to sell its Pharmaceuticals unit which, apart from strengthening its balance sheet, will allow the company to focus on its core businesses. In November 2011, Surmodics sold the assets of the Pharmaceuticals division to Germany’s Evonik Industries AG for $30 million cash. Following the sale, SurModics reports through two divisions. The divisions are Medical Devices and In Vitro Diagnostics.

We note that SurModics has taken a number of steps following its disappointing showing in fiscal 2010 (ended September 30, 2010). In August 2011, with a view of optimizing its resources and maximizing long-term growth potential, SurModics trimmed its work-force by 9%. Earlier, in October 2010 also SurModics trimmed its work-force by 13% and made certain changes to its organizational structure.

Moreover, following the disappointing performance in fiscal 2010, SurModics revamped its board of directors and also brought about a change at its helm, with the appointment of a new CEO, Gary R. Maharaj. We note that Maharaj was formerly the President and CEO of Arizant Inc., which was sold to 3M Co. (MMM - Analyst Report) in October 2010.

The moves are yielding positive results as can be seen from the improved performance delivered by SurModics in fiscal 2011 when earnings grew approximately 18% year over year. The impressive performance continued in the first quarter of fiscal 2012 with adjusted earnings improving 37.5%.

We believe that the stock will continue to perform well in the coming quarters and see the current share price as an attractive entry point for long-term investors.

Read the full analyst report on SRDX