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Shares of Thoratec Corp (THOR - Analyst Report) reached a 52-week high of $38.12 on Friday, November 2, 2012. The closing price of this medical device stock as of November 2, 2012 was $36.62, which represented a solid year-to-date return of 13.6%.

Moreover, the company has delivered positive earnings surprises in six of the last seven quarters with an average beat of 14.3%.

Growth Drivers

Several factors such as solid performance in the third quarter, raised guidance, attractive opportunity in the Destination Therapy (DT) market and growth opportunities in the international markets, are driving the stock price.

On November 1, 2012, Thoratec reported third quarter 2012 adjusted earnings per share of 44 cents, easily surpassing the Zacks Consensus Estimate of 33 cents as well as the year ago earnings of 34 cents per share. Revenues improved 15% year over year to $117.8 million in the quarter, beating the Zacks Consensus Estimate of $112 million.

Growth was led by higher volume of HeartMate II product line (up 27% year over year) as well as the development of DT in the domestic market in which Thoratec enjoys market monopoly. Geographically, domestic sales surged 16% year over year to $97.5 million, while overseas sales increased 9% to $20.3 million. The contagion of economic problems in Europe did not have any significant impact on the most recent quarter’s performance.

Further, Thoratec continues its robust performance in the international market, especially Western Europe. The company also attempts to expand its geographical foothold and explore newer markets for its offerings. Additionally, after the reimbursement approval in Japan (expected in the ongoing quarter), the company will be able to serve one of the largest focus markets for its products.

Thoratec has revised its financial forecast for 2012. The company expects revenues between $477 million and $483 million compared with the prior guidance of $460 million and $470 million. The updated guidance includes higher sales estimates for HeartMate II product line and solid expansion of the ventricular assist device (VAD) market.

For 2012, earnings per share (on a reported basis) are now projected in the range of $1.40 to $1.44 compared to the prior guidance of $1.28 to $1.34 while adjusted earnings are expected to be in a band of $1.79 and $1.83, compared with the prior guidance of $1.67 and $1.73.

The company is currently developing its HeartMate III and targets CE Mark approval in Europe (expected in mid 2013) followed by clinical trials in the U.S. before the end of 2013. Next generation HeartMate devices are expected to be accretive to the company’s growth in the long-term.

However, its dominance in the bridge-to-transplant (BTT) indication will be challenged following the prospective approval of HeartWare International’s (HTWR - Snapshot Report) Ventricular Assist System later this year. Australian heart pump maker HeartWare is expected to close the technology gap with the launch of its next generation VAD product.

Earnings Estimate Revisions

The Zacks Consensus Estimate for fiscal 2012 increased approximately 24.5% to $1.81 per share over the last 7 days. The current estimate implies year-over-year growth of 31.16%.

For fiscal 2013, the Zacks Consensus Estimate remained unchanged at $1.58 per share, implying year-over-year decline of 12.85%.

Valuation

The company’s strong fundamentals justify the premium valuation of the stock. Thoratec currently trades at a forward P/E of 24.2x, a 17% premium to the peer group average of 20.68x. Moreover, the price-to-sales ratio of 4.5x is at a 18.7% premium to the peer group average of 3.79x.

Thoratec has a trailing 12-month ROE of 14.5% compared with the peer group average of 15.1%.

About the Company

California-based Thoratec is a leading developer of innovative devices for advanced heart failure. Founded in 1976, the company offers employment to about 800 people worldwide. With a market capitalization of roughly $2.11 billion, Thoratec owns manufacturing facilities across the U.S., U.K. and Switzerland.

We currently have a long-term Outperform recommendation on Thoratec. The stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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