We maintain our Neutral recommendation on international orthopedic devices company Wright Medical (WMGI). Its third-quarter fiscal 2011 adjusted earnings per share (excluding one-time items other than stock-based compensation expense) of 16 cents met the Zacks Consensus Estimate.
The company incurred a loss in the quarter, hit by hefty charges including costs associated with restructuring. Revenues fell 3% year over year to $118.2 million, missing the Zacks Consensus Estimate. Declines across hip and knee franchises were partly offset by gain in the extremity business. The company lowered its guidance for fiscal 2011.
Wright Medical is a global orthopedic devices company specializing in the development and marketing of reconstructive joint devices and bio-orthopedic materials. It is a leader in the U.S. and German markets for foot and ankle surgical products. The company retains its strength in the niche extremities segment.
We feel future revenue growth will be supported by new product (including internally developed and those from acquisitions) launches. Moreover, new deals in extremities, Wright Medical’s fastest growing segment, are expected to bolster growth in this business. Within extremities, foot and ankle products are expected to be a major growth driver.
In a major move, Wright Medical recently announced that it is exercising a cost restructuring initiative to improve profitability, promote growth and strengthen cash flow, leading to enhanced shareholder value. The restructuring initiative will lead to a more cost efficient enterprise, which will boost earnings in 2012.
As per the plan, Wright Medical has launched several measures to curtail expenditure, including cutting down the range of its overseas product offerings, streamlining its R&D efforts, fine tuning factory operations and reducing headcount.
Wright Medical’s restructuring initiative is expected to create annual operational efficiency, which will strengthen its fiscal performance starting 2012 while generating investments for long-term growth. Moreover, with a robust balance sheet, the company is well positioned to engage in further acquisitions.
However, our views are moderated by lingering compliance issues and intense competition from larger orthopedic players. Wright Medical competes with much larger players such as Zimmer Holdings (ZMH), Stryker (SYK), Johnson & Johnson’s (JNJ) De Puy and Smith & Nephew (SNN).
Moreover, the company remains exposed to pricing/procedure volume headwinds. Costs associated with restructuring will also continue to be a drag on the company’s bottom line. Our view on the stock is supported by a short-term Zacks #3 Rank (Hold).
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