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Greatbatch Reiterated at Neutral

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On Mar 27, we retained Greatbatch, Inc. at Neutral, following its mixed fourth-quarter results. Although it managed to grow at a double-digit rate in the quarter in terms of both the top and bottom line, Greatbatch continues to face operational hazards.

Why the Retention?

On Feb 25, Greatbatch posted fourth-quarter 2012 adjusted earnings per share of 53 cents, which beat the Zacks Consensus Estimate of 50 cents and significantly exceeded the year-ago adjusted earnings of 39 cents (up 36% year over year). The increase was led by gross margin expansion along with controlled RD&E spending.

Revenues grew 12% year over year to $159.2 million in the fourth quarter but missed the Zacks Consensus Estimate of $163 million. Accretion from the recent acquisitions of about $20.3 million and growth in the vascular business offset the organic constant currency decline of 2% due to lower Cardiac and Neuromodulation sales.

Over the trailing four quarters, the company missed the Zacks Consensus Estimate, with a negative average surprise of 0.45%. However, following the release of the fourth-quarter results, the Zacks Consensus Estimate for 2013 and 2014 moved up 2.6% and 19.4% to $1.97 and $2.22 per share, respectively. Currently, the company retains a Zacks Rank #3 (Hold).

Greatbatch is primarily a producer and supplier of batteries, capacitors, and components used in implantable medical devices (IMDs). Its top customers include leading players such as Medtronic (MDT - Free Report) and St. Jude Medical . We believe that long-term partnerships with such large OEM companies along with acquisitions and new products should ensure long-term growth for the company.

However, Greatbatch has been struggling to remediate operational hazards at its Swiss orthopedic facilities, which were leading to loss. Despite the struggle, management believes that results should improve from the first quarter of 2013 based on the restructuring initiatives. Although the news is encouraging, we remain on the sidelines until the company shows clear signs of improvement. Additionally, a sluggish CRM market is likely to remain a drag on the top line.

Other Stocks to Consider

While we remain on the sidelines for Greatbatch, semi-discretes company – Cree, Inc. (CREE - Free Report) with a Zacks Rank #2 (Buy) warrants a look.

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