There just aren't that many pick-and-shovel plays in the medical device world. Many medical device companies like to do everything themselves, and the things that they do often outsource tend to be low-value functions such as plastics molding and packaging.
Greatbatch (NYSE:GB), formerly known as Wilson Greatbatch, is one of those few worthwhile plays. A designer and manufacturer of batteries and other electrical components largely for the medical device industry, the company had a solid second quarter as it continues to benefit from the robust market for implantable cardioverter defibrillators, which correct heart arrhythmias.
Reported sales climbed 20% for the quarter, with medical device components growing by 9% and making up about 86% of the total. The company also sells batteries to markets with rugged and demanding product needs, such as oil and gas exploration companies, and this part of Greatbatch's business grew 30% for the quarter.
Unfortunately, Greatbatch lost a lot of this performance on the operating side of the business. Gross margin slipped 550 basis points because of a combination of excess capacity, lower selling prices, and higher input costs. Elsewhere, the company saw higher compensation and marketing expenses as well as costs relating to new facilities and the discontinuation of a product development project. In all, operating margin slipped 200 basis points and operating income grew only 4% for the quarter.
This bottom-line result isn't scintillating. But the fact still remains that major players in implanted electrical medical devices -- St. Jude (NYSE:STJ), Medtronic (NYSE:MDT), Guidant (NYSE:GDT), Cyberonics (NASDAQ:CYBX) and Sorin -- all do business with Greatbatch. And the company works with many smaller medical companies, too.
The good news is that this is a business with meaningful economic moats around it. Once a device is approved with a certain battery and component configuration, it is generally difficult and costly to swap that out. Thus, once Greatbatch is in a product, it's pretty likely to stay there.
What's more, it's not cheap or easy for a customer to design around Greatbatch. Yes, there are competitors, and some customers design their own components or batteries, but that's not an appealing option for many companies that would rather be medical device developers instead of battery and electronics designers.
You don't have to look too far ahead to see an even bigger role for implanted electrical devices in medicine. In fact, I'd say that neurostimulation still has huge potential ahead of it. Greatbatch won't get all of that business, but it will likely get enough to keep growing at a respectable clip.
This stock is not cheap, and metrics such as profit margin and return on equity aren't as high as I'd like. That said, the stock does offer a fairly unique way to play multiple growing medical markets.
For more Foolish takes on medicine:
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
