Greatbatch (GB) Lifted to Neutral

We upgrade our recommendation on Greatbatch Inc. (GB) to Neutral following its better-than-expected results in the last quarter and our improved visibility on the stock. Second-quarter fiscal 2010 revenues and earnings beat the Zacks Consensus Estimate on the back of healthy double-digit growth in the company’s Vascular and Electrochem businesses.

We feel that improving trends across the Vascular and Electrochem markets should boost revenues moving forward. Greatbatch has registered healthy double-digit growth in these segments in the latest quarter, leading to earnings (up 19%) and top-line (up 5%) expansions for the first time in the last four quarters. However, this was partly marred by a sluggish Orthopedic division.

The company’s Vascular business is benefiting from higher catheter sales and a favorable ordering trends while the Electrochem division is poised to gain from a resurgent Energy and Portable Medical markets. However, the Orthopedic operation has been hit by foreign exchange headwinds (stemming from a weak euro) which are expected to continue to affect the unit’s sales for the remainder of fiscal 2010.

Greatbatch is a leading producer and supplier of batteries, capacitors and components used in implantable medical devices. The company has been acquiring complementary businesses over the last few years to boost top line. Greatbatch recently extended its tie-up with St. Jude Medical (STJ), which has provided it an exclusive supplier status of filtered feedthroughs (used in CRM devices) through 2017.

Greatbatch has generated solid operating cash flows during first half of fiscal 2010, which helped it repay debt worth $30 million in the second quarter. The company expects to continue using cash flows to repay debt and meet capital expenditure requirements.

Moving forward, operating results will be supported by the rebound across the Vascular and Electrochem operations. Moreover, synergies from cost-cutting and restructuring initiatives as well as better product mix are expected to boost margins. However, top-line growth is expected to remain stalled by the seasonality factor, customer inventory adjustments and foreign exchange headwinds.

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