Medical technology company Integra LifeSciences (NASDAQ:IART) will report Q4 2006 financial results on Wednesday, Feb. 28.

What analysts say:

  • Buy, sell, or waffle? Seven analysts put Integra LifeSciences under the microscope, and four of them say "buy," while three say "hold."
  • Revenues. Revenues are expected to increase 65% to $120.6 million, based on the acquisitions the company has made to fuel its growth.
  • Earnings. Profits, however, are expected to rise a more modest 13% to $0.42 per share.

What management says:
When a company is on an acquisition spree the way Integra is, it's tough to make year-over-year comparisons. For the third quarter, revenues increased 68% over the year before, but the acquisitions made in the first nine months of the year contributed to three-quarters of the growth. Of the $47.3 million increase, new-product acquisitions accounted for $35.7 million for the quarter. Yet the entire medical technology sector has been under consolidation, most notably with Boston Scientific's (NYSE:BSX) $25 billion purchase of Guidant.

Integra LifeSciences has been smart with its purchases, though. In the neuro and ortho implants segment, the $40 million acquisition of Kinetikos Medical should pay for itself, even if the company hits certain targets for growth and nets an additional $20 million earn-out payment. The whole segment grew 29% in the third quarter, while the medsurg equipment sector more than doubled on the strength of mergers and acquisitions.

What management does:
Many of Integra's recent acquisitions involve businesses or product lines that overlap in some way with its existing products, which has led to some cannibalization of sales. While they've allowed the company to maintain strong and consistent profits at the gross and operating levels, the acquisitions and subsequent restructurings have been eating away at net profits. Yet because of Integra's debt agreements, which it has also restructured, interest expense rose sharply in the third quarter, further eroding margins. Look for net margins to improve going forward.

Margin

09/05

12/05

03/06

06/06

09/06

Gross

62.1%

63.6%

64.1%

64.2%

63.7%

Operating

21.0%

23.4%

24.0%

24.7%

23.3%

Net

13.7%

13.4%

13.0%

11.8%

8.1%
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Merger and acquisition activity in the medical device segment remains high, driving valuations for these companies higher as well. While rolling up products under Integra's roof can be a strategy for growth, it can also get expensive. Goodwill makes up more than a quarter of Integra's total assets, which isn't uncommon with a serial acquirer. Add in "identifiable intangibles," and more than 55% of its asset base consists of ephemera.

As Fools have recently pointed out, Integra is growing, but not organically. Digesting a lot of acquisitions can lead to corporate heartburn, and Integra LifeSciences hasn't yet shown that it's got the stomach for all of these deals.

Competitors:

  • CYTYC (NASDAQ:CYTC )
  • Aspect Medical (NASDAQ:ASPM)
  • Intuitive Surgical (NASDAQ:ISRG)
  • Medtronic (NYSE:MDT)
  • Stryker (NYSE:SYK)

Related Foolishness:

Integra LifeSciences has earned a three-star rating from Motley Fool CAPS, the new investor intelligence community. You can add your voice to the new stock rating service by joining today. It's free!

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. Intuitive Surgical is a Rule Breakers recommendation. The Motley Fool has a disclosure policy.