We reaffirm our Outperform rating on orthotic and prosthetic (O&P) company Hanger Orthopedic (HGR) as we remain upbeat about its business prospects. Earnings for first-quarter fiscal 2011 matched the Zacks Consensus Estimate while profit skyrocketed 55% year over year owing to the combined impact of higher revenues and management’s cost containment initiatives.
Healthy contributions from the company’s therapeutic solutions and distribution businesses coupled with the acquisition of rehabilitation technologies provider Accelerated Care Plus (“ACP”) fueled double-digit growth in the top line. However, sales missed the Zacks Consensus Estimate. Hanger’s patient care business was negatively impacted by inclement weather.
The company raised its earnings forecast for fiscal 2011 while maintaining its sales expectation for the year. Moreover, it remains optimistic about the growth prospects in its patient care business for the remainder of fiscal 2011.
Hanger leads in the O&P patient care services market, operating through more than 675 patient care centers across the U.S. The company is enjoying healthy demand for its services. Linkia (one of Hanger’s four business units), the first managed care organization dedicated solely to the O&P market, remains a significant growth engine for the company. Linkia continues to expand its relationship with national and regional insurance companies.
Hanger’s economies of scale are unmatched by its competitors which include notable players in the O&P space such as Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI).
To expand its geographic presence, Hanger is pursuing small tuck-in acquisitions. The company’s $155 million acquisition of ACP in December 2010 has added a fresh avenue of growth. Hanger anticipates the transaction to be accretive in 2011.
Hanger has substantially completed the relocation of its headquarters from Bethesda, Maryland, to Austin, Texas. The company is poised to achieve meaningful cost synergies from its corporate relocation. Another significant growth catalyst represents broader reimbursement coverage for its electrical stimulation device WalkAide. Moreover, Hanger is preparing to roll out a pediatric version of WalkAide.
However, Hanger’s back-to-back acquisitions could lead to substantial integration risk. Our recommendation on the stock is in consonance with the Zacks #2 Rank, which translates into a short-term Buy recommendation.
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