Greatbatch Remains Neutral

We reiterate our Neutral recommendation on Greatbatch, Inc. (GB - Analyst Report) following its second quarter results. In the reported quarter, adjusted earnings per share of 43 cents were in line with the Zacks Consensus Estimate.

Revenues grew 14% year over year to a record $166.5 million in the quarter, beating the Zacks Consensus Estimate of $162 million. However, reported profit plunged 55% year over year to roughly $3.9 million (or 16 cents a share) due to higher operating expenses in the Orthopedic division.

Greatbatch has been registering solid double-digit growth in its Vascular business, leading to top-line expansion. Growth in the underlying markets coupled with market share gains is contributing to higher revenues from the Vascular business. New product launches and commercialization of medical devices from the QiG group are expected to further boost revenues in the future.

Moreover, the recent acquisition of Micro Power has provided opportunities to diversify the Electrochem business by expanding its foothold in the portable medical battery market and stimulating growth in other key areas. The acquisition started to contribute meaningfully to the company’s top line in 2012 and is expected to be accretive to earnings starting 2013.

In addition, Greatbatch has been investing heavily in research and development (R&D), to establish itself as a provider of complete medical devices systems. The QiG Group, under the Vascular business, is developing nearly a dozen new medical devices in collaboration with its Original Equipment Manufacturing (“OEM”) partners. The group is also independently working on four medical devices, the most notable of which is the Algostim spinal cord stimulator for chronic pain treatment in trunk and limbs.

Further, the company recently opened its first R&D center in Singapore to develop cost-effective active implantable medical devices. This is also the first step for the company to gain access into emerging markets, especially the Asia-Pacific region.

However, Greatbatch’s European Orthopedic business has been experiencing operational headwinds mainly due to manufacturing and product development difficulties. It led to delayed shipments and canceled orders, which in turn is hurting Greatbatch’s margins and profitability. The company is now expecting operating income and earnings towards the lower end of its 2012 guidance.

Furthermore, the CRM/Neuromodulation division has been hit by a number of factors including pricing pressure, customer inventory adjustment and economic softness. Revenues from this business are expected to remain under pressure moving forward, as reflected in the company’s guidance for 2012.

However, quite unexpectedly, and despite macroeconomic headwinds, the division is showing signs of improvement on the back of new product launches. We believe that focused sales and marketing initiatives along with sustained product development opportunities will drive the company to achieve its full-year CRM sales guidance.

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 Medical (STJ - Analyst Report). We currently have a Neutral recommendation on Greatbatch, which carries a short-term Zacks #4 Rank (Sell).