Balanced View on Greatbatch - Analyst Blog

On April 8, we have updated our research report on Greatbatch, Inc. GB.  We are concerned about the softness in the smaller Electrochem division and significant customer concentrations risks but remain optimistic about the company's effort to become a provider of complete medical devices system by heavy investment on R&D.

Despite a 3.8% rise, GB's 2013-fourth quarter earnings of 55 cents missed the Zacks Consensus Estimate by a penny. Net revenues in the quarter improved 11.0% (13% on an organic constant currency basis) to $176.6 million, which was almost in line with the Zacks Consensus Estimate of $176.0 million.

The increase in revenues was attributable to higher cardiac/neuromodulation and orthopaedic product lines sales driven by market share gains due to increased sales and marketing investment, customer product launches and the release of backlog owing to the Swiss consolidation.

These positive factors affecting revenue growth were partially offset by an 18% decline in portable medical sales due to the difficult comparable versus the year-ago quarter as well as pricing discipline, which led to a loss of some low-margin businesses.

For 2014, GB expects revenues in the range of $685 to $705 million, reflecting a 3 to 6% rise over 2013. The Zacks Consensus Estimate of $695 million for 2014 revenues lies within the guided range. The company also anticipates adjusted operating margin between 13.0 and 13.3%, reflecting a 50 to 80 bps rise from 2012.

Finally, GB expects adjusted earnings per share in the range of $2.25–$2.35, indicating a 7 to 12% rise over 2013. The Zacks Consensus Estimate of $2.33 lies within the guided range.

GB expects to grow through its efforts to develop innovative medical devices and build a healthy product pipeline. The company's acquired complementary businesses have added new proprietary technologies, manufacturing capabilities, and development resources, apart from broadening its customer base.

However, GB faces significant customer concentration. In 2013, its top three customers, Johnson & Johnson JNJ, Medtronic, Inc. MDT, and St. Jude Medical Inc. STJ collectively accounted for 49% of the company's total sales

Currently GB carries a Zacks Rank #3 (Hold).