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Cyberonics Reiterated at Outperform

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We recently maintained our Outperform recommendation on Cyberonics , a major neuromodulation company, with a target price of $63.00.

The recommendation is primarily based on the company’s strong future growth prospects.  Over the last few quarters, Cyberonics has consistently delivered strong results through balanced sales growth worldwide. In the last-reported quarter, total sales increased a robust 17% year over year to $63.0 million and adjusted earnings grew 37.5% to 44 cents per share. The results surpassed the Zacks Consensus Estimates of $60 million and $0.39, respectively.

The upside in revenues (representing the second successive quarter of over $50 million sales) was primarily attributable to robust growth in the U.S. epilepsy device sales (increasing by 16%) and unit sales (by 12.3%). The redesigned AspireHC generator that received FDA approval in January 2012, comprised 17% of the U.S. generator unit sales in the reported quarter. Over 77% of the U.S. generator sales came from Demipulse and AspireHC. We expect all these product lines to boost Cyberonics’ top-line performance in the upcoming quarters.

After a couple of quarters of sluggish international sales, the company recorded robust sales growth of 28.3% in this region, favorably impacted by double-digit sales growth in Europe, increased shipments to Japan as well as improved sales in all other international regions. Cyberonics remains positive about its initiatives to invest in market development and achieve new patient and replacement cycle growth in Europe and Japan, which are expected to further improve the company’s performance in these regions.

In Europe, the company’s increased investments and organizational changes have proved helpful, which was reflected in the double-digit growth in overall performance for the third consecutive quarter. Moreover, the company deployed senior sales and marketing teams from the U.S. in Europe and Japan to strengthen the organization. Cyberonics expects all these initiatives to improve its international performance for the rest of fiscal 2013.

Cyberonics is also focusing on strengthening its pipeline. The company is currently working on the development of future generations of the Vagus Nerve Stimulation (VNS) Therapy System, which includes generators that utilize cardiac and brain-based seizure detection stimulation paradigms, rechargeable battery technology, wireless communication technology and improved lead technology.

We remain concerned about the challenging macroeconomic scenario and competitive pressures from players like Medtronic (MDT - Free Report) and St. Jude in the neuromodulation space. However, considering the advantages of the VNS therapy system and the strong untapped potential in the epilepsy market, we are optimistic about the growth prospects of the company.

Cyberonics carries a Zacks #2 Rank (Buy) in the short term.

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