Earnings Scorecard: SurModics

Following the release of second quarter fiscal 2011 results on April 27, 2011, there have been significant revisions to the annual estimates for SurModics Inc. (SRDX) for fiscal 2011 and fiscal 2012 by a majority of the analysts covering the stock.

Second Quarter Highlights

SurModics Inc.’s second quarter fiscal 2011 earnings (excluding special items) of $0.08 per share were well ahead of break-even earnings suggested by the Zacks Consensus Estimate.

Revenues on an adjusted basis dropped 4.9% year over year to $17.4 million in the reported quarter. Revenues, however, surpassed the Zacks Consensus Estimate of $15 million. On a sequential basis, adjusted revenues increased 13%. Reported revenues increased 15% sequentially to $17.5 million.

Apart from releasing financial results, SurModics also provided guidance for fiscal 2011. The impressive sequential performance prompted the company to up its fiscal 2011 projections for revenues and adjusted earnings per share.

Agreement of Estimate Revisions

There is a significant positive bias in the estimate revisions for fiscal 2011 and fiscal 2012 over the last 30 days. Over the last 30 days, 3 of the 4 analysts following the stock have upped their earnings estimates for fiscal 2011 with no downward movement. For fiscal 2012, all 4 analysts following SurModics have increased their earnings estimates over the last 30 days.

The overwhelming upward bias is primarily attributable to the strong performance delivered by the company in the second quarter of fiscal 2011. The impressive showing prompted the company to raise the revenues and earnings guidance for fiscal 2011.

SurModics expects to end fiscal 2011 with revenues of $63 million-$68 million as against the previously forecasted range of $55 million-$63 million. Adjusted earnings per share for fiscal 2011 are projected in the range of $0.13-$0.26. The company was earlier guiding towards a range of a loss of $0.15 to earnings of $0.05.

The analysts following the stock have also raised their estimates accordingly. Moreover, the moves made by the company to revive itself after below-par performances in the past few quarters are also encouraging.

We are pleased by the company’s move to explore options regarding the Pharma unit, including its potential sale, as the move will enable it to focus on its core business and enhance shareholder value.

The company has also brought about a change at its helm to revive itself with Gary R. Maharaj taking over as the President and CEO. Maharaj, a former President and CEO of Arizant Inc., which was sold to 3M Co. (MMM) in October 2010, is also a member of the board of directors at SurModics.

In another encouraging move, SurModics revamped its board of directors. We note that late last year, SurModics trimmed its work-force by 13% and made certain changes to its organizational structure to streamline operations and increase efficiencies.

Magnitude of Revisions

Estimates for fiscal 2011 have gone up by $0.18 over the last 30 days. The current Zacks Consensus Estimate for fiscal 2011 is $0.20, well within SurModics’ guidance of $0.13 – $0.26 per share. Fiscal 2012 estimates are up by $0.25 to $0.45 over the last 30 days following the upward estimate revisions.

Our Take & Recommendation

We recently upgraded SurModics to Outperform from Neutral following its strong showing in the second quarter of fiscal 2011. We expect that the measures undertaken by the company to revive itself to yield the desired results and drive growth. Our long-term recommendation is supported by the Zacks #1 Rank (Strong Buy) carried by the company in the short-run.

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