A Nasty Jolt to Greatbatch

From the likes of St. Jude (NYSE: STJ  ) and Medtronic (NYSE: MDT  ) , we've heard that ICD sales growth was on the low end of expectations, and that the market's not quite growing like it was earlier in 2005. You might think, then, that medical battery and component provider Greatbatch's (NYSE: GB  ) stock slid because of a little softness on its top line.

Nope. Sales were fine -- actually a bit higher than the average estimate. The trouble this quarter was margins. Whether or not you accept the company's explanation regarding higher warranty costs, the adjusted reported number missed expectations, and investors weren't happy about it.

In the ensuing sell-off, few may have recognized that sales were up 27%, with product lines like ICD batteries and capacitors doing even better. What's more, all this was done with Guidant (NYSE: GDT  ) making up more than one-third of sales. Sales growth like this, even when a major customer is still having problems, may suggest decent underlying conditions for the company.

The two questions here are whether or not ICD growth will stay strong, and whether or not the company will ultimately improve its margins (part of the promise of a new facility). Management is very positive on the first point, saying that it sees ICD unit growth "in the 20% range going forward almost as far as the eye can see," and it's similarly optimistic on the margins front.

Whatever the case may be, Greatbatch needs to do better. A rough calculation of return on invested capital (adjusting for various charges and settlements and so on) generates a pretty pathetic single-digit number. And while investors may give growth companies a pass on metrics like ROIC, they eventually do matter.

Frankly, valuation here is a pain. Going bcash flow, the stock looks overpriced even now. By its price-to-sales ratio, it looks pretty cheap. And before I get a bunch of emails on the subject, yes I know that price-to-sales isn't a very good way to value stocks, but it's still used a fair bit in the medical device world. Even so, this stock doesn't exactly make my heart skip a beat.

For more medical missives:

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).


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