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On Mar 21, we retained Hanger Inc. (HGR - Analyst Report) at Neutral, following its solid fourth-quarter 2012 results. In spite of the upbeat performance, we remain on the sidelines given the uncertain healthcare environment.

Why the Retention?

On Feb 13, Hanger’s adjusted earnings of 58 cents per share for the fourth quarter of 2012 surpassed the Zacks Consensus Estimate by 2 cents. Profits surged 16% on the back of organic growth across all 3 businesses coupled with accretive acquisitions and controlled expenses.

Revenues increased 9.7% year over year to $272.2 million in the quarter, beating the Zacks Consensus Estimate of $268.0 million. The company’s Therapeutic business showed signs of a turnaround in the quarter.

The company’s earnings have also managed to beat the Zacks Consensus Estimates in the last 4 quarters with an average surprise of 5.20%. Following the earnings release, the Zacks Consensus Estimate for 2013 has moved up by 3.0% to $2.06 per share, but dropped 2.5% to $2.31 per share for 2014.

Hanger enjoys a sovereign position in the orthotic and prosthetic (O&P) market and continues to gain market share. The company is focusing on expanding its geographical footprint and revenues through complementary acquisitions.

However, Hanger remains affected by a host of macro issues including sequestration, fiscal cliff negotiations and measures (including Medicare and Medicaid reimbursement cuts) adopted by the state governments to cover budget deficits. Moreover, the impact of the medical devices tax is likely to put pressure on the company’s margins. These factors are apprehended to weigh on the company’s results going forward.

Other Stocks to Consider

Other large-cap medical products companies such as Nuvasive (NUVA - Snapshot Report), carrying a Zacks Rank #1 (Strong Buy), as well as Abaxis (ABAX - Analyst Report) and Edwards Lifesciences Corp. (EW - Analyst Report), which carry a Zacks Rank #2 (Buy), are expected to do well in the medical industry.

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