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SurModics Inc. (SRDX - Free Report) has delivered four positive earnings surprises in the last five quarters, and its shares have been on an uptrend since last June. Following the third quarter fiscal 2012 earnings release, which included a 30.8% earnings surprise and an upbeat guidance, shares of this drug delivery and surface modification technology provider got an extra boost to hit their 52-week high on August 6.

With a year-to-date return of more than 22%, a strong financial position and improving fundamentals, this Zacks #2 Rank (Buy) stock offers an attractive investment opportunity for growth-seeking investors.

Solid 3Q and Upbeat Guidance

On August 1, SurModics reported third quarter fiscal 2012 (ended June 30, 2012) adjusted earnings per share of 17 cents, beating the Zacks Consensus Estimate of 13 cents and the year-ago earnings of 12 cents. Adjusted revenues jumped 17.5% year over year to $13.7 million, surpassing the Zacks Consensus Estimate of $12 million.

Revenues on a reported basis (including special items) were up 7.4% to approximately $14 million, due to increased sales from vitro diagnostics and hydrophilic coatings.

Encouraged by the strong performance, SurModics raised its forecast for fiscal 2012 and now expects to earn between 56 cents and 59 cents per share on revenues of $51 million to $52 million. The previous guidance had earnings between 45 cents and 53 cents on revenues of $47 million - $51 million.

Furthermore on August 6, SurModics announced the commencement of a tender offer to repurchase up to $55 million shares of its common stock.

Earnings Estimates are Climbing

Over the last 7 days, the Zacks Consensus Estimate for fiscal 2012 climbed 13.7% to 58 cents, aided by two upward revisions out of three estimates. For fiscal 2013, the Zacks Consensus Estimate increased 12.7% to 71 cents per share on the back of upward revisions from two of four estimates. The estimate for fiscal 2012 represents a year-over-year jump of 80.2%, while the estimate for fiscal 2013 implies an increase of approximately 23.6%.

Mixed Valuation

SurModics’ valuation presents a mixed picture. On a price-to-book (P/B) basis, shares are trading at 2.09x, compared with the peer group average of 1.91x. Also, the company has a price-to-sales (P/S) ratio of 5.66, a 190.3% premium to the peer group average of 1.95.

However, on a forward P/E basis, shares trade at 30.9x, a discount to the peer group average of 35.1x. Also, the company has a trailing 12-month return on equity (ROE) of 5.8%, which is above its peer group average of 4.9%. This implies that the company reinvests its earnings more efficiently than its peer group.

On the Recovery Path

Following the disappointing performance in fiscal 2010, SurModics took a number of steps to increase efficiencies, including trimming its work-force and appointing a new CEO. Moreover, the company’s move to sell its Pharmaceutical unit to focus on its core business is also a prudent move.

The earnings growth is reflected in the chart below.

SurModics, formerly known Bio-Metric Systems, Inc, was founded in 1979 and is headquartered in Eden Prairie, Minnesota. The company, a provider of surface modification and drug delivery technologies to the healthcare industry, has a market cap of $312.62 million. Until fiscal 2011, SurModics operated through three business units: Medical Devices, Pharmaceuticals and In Vitro Diagnostics. However, in November 2011, SurModics sold the assets of the Pharmaceuticals division to Germany’s Evonik Industries AG. Since first quarter of fiscal 2012, SurModics reports through two divisions – Medical Devices and In Vitro Diagnostics.

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