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We recently upgraded SurModics Inc. (SRDX - Analyst Report) to Outperform from Neutral following its impressive showing in the second quarter of fiscal 2012 (ended March 31, 2012). Our decision is justified by the Zacks #2 Rank (Buy rating) carried by the company in the short run.
SurModics’ second quarter fiscal 2012 adjusted earnings of $0.14 per share beat the Zacks Consensus Estimate by $0.02. The earnings beat was attributable to higher-than-expected revenues. Given SurModic’s strong product portfolio, we expect it to achieve the fiscal 2012 revenue guidance of $47-$51 million.
We are also pleased with the sale of SurModics’ Pharmaceuticals unit as this has allowed the company to focus on its core businesses. We note that performance of the company has been steadily improving since a disappointing fiscal 2010.
The company took a number of corrective measures, including a change at its helm. We believe SurModics will continue performing well going forward and have raised our earnings estimates for fiscal 2012 and fiscal 2013.
Following the disappointing performance in fiscal 2010, SurModics revamped its board of directors and appointed a new CEO, Gary R. Maharaj. We note that Maharaj is the former President and CEO of Arizant Inc., which was sold to 3M Co. (MMM - Analyst Report) in October 2010.
We are also impressed by SurModics’ strong financial position. At the end of the second quarter of fiscal 2012, the company had cash and investments totaling $102.6 million with no long-term debt burden. The amount is inclusive of $2.9 million (already released from escrow) pertaining to the sale of the Pharma unit. The company generated operating cash flow of $4.2 million in the second quarter of fiscal 2012, up 121% sequentially.
We believe the strong cash position augurs well for further acquisitions in addition to investment in the current business and share repurchases. A $50 million share buyback program was cleared by the Board of Directors in May 2012. We believe that the buyback program highlights the company’s commitment to create value for shareholders.
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