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Following its third quarter results, we are upgrading our recommendation on Conmed Corporation (CNMD - Analyst Report) to ‘Neutral’ with a target price of $28.

The company’s earnings per share of 43 cents in the reported quarter beat the Zacks Consensus Estimate. Profit was also up 13.5% in the reported quarter, led by acquisitions and cost containment measures. Moreover, the guidance provided for 2013 by the company is higher than that of 2012, which reaffirms our belief that the company is showing signs of improvement.

Conmed derives roughly 80% of its total revenues from single-use disposable products, which remain the mainstay of its business. Sales of these products grew 7% in the reported quarter and continue to drive top-line growth.

The company offers a wide range of surgical products. It is benefiting from the increasing trend of using minimally invasive techniques as a large percentage of the company’s products are designed for these procedures. Products, such as the Altrus and Sequent along with new products from the Endoscopic Technologies business, are expected to drive top-line growth going forward.

Further, Conmed completed the acquisition of Massachusetts-based healthcare company, Viking Systems Inc. in the third quarter. Viking has developed the innovative 3D-HD Vision System, which is used during minimally invasive laparoscopic surgeries. The acquisition is expected to boost Conmed’s surgical video products portfolio.

For 2013, Conmed’s revenues are anticipated between $785 million and $795 million which are higher than that for 2012 ($765 million and $770 million), indicating an improvement in results in the foreseeable future. Conmed expects adjusted earnings in the band of $1.80 to $1.90 per share for 2013, reflecting 5% growth in earnings per share.

The prevailing global economic headwinds and the difficult capital purchase environment continue to affect growth. Moreover, manufacturing difficulties and slower product adoption, significant competition and pricing pressure remain additional challenges. Conmed operates in a highly-competitive orthopedic surgery market against much larger, more technically-competent companies, such as Covidien plc. (COV - Analyst Report), Smith & Nephew plc. (SNN - Snapshot Report) and Stryker Corporation (SYK - Analyst Report).

Our upgraded ‘Neutral’ recommendation on the stock is supported by a short-term Zacks #3 Rank (Hold rating).

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