A year after watching its stock go into cardiac arrest, vital signs at Greatbatch
Greatbatch, the Clarence, N.Y.-based maker of power sources and components for implantable medical devices and for military, oil, and aerospace oil applications, saw its shares fall by two-thirds from an all-time high of nearly $45 in January 2004 to a low of $15 in August. That was after twice revising downward its revenue forecast because of lower orders from Guidant
Since then, the outlook has stabilized, leaving investors to wonder whether a 30% drop in earnings and an 8% fall in revenue really warranted a 66% plunge in the stock price. With the stock advancing to $24 in the past month, the company has taken at least one step away from the Wall Street graveyard.
Gross margins (revenue minus cost of goods sold) are beginning to improve after sinking to nearly 35% in the fiscal fourth quarter. Margins ticked up to about 37% in the current first quarter, although they're still several beats away from the 41.7% recorded in the first quarter of 2004. Company officials said in a recent conference call that although they don't foresee a 40% return this year, margins could climb after the company opens a new plant in Mexico in 2006.
What's more, first-quarter profits of $0.19 a share beat estimates by $0.10, and sales came in $10 million higher than anticipated. The company also boosted its annual sales outlook by $5 million to a range of $210 million to $225 million. Analysts now call for profits of $0.60 a share on an operating basis for 2005.
Research expenditures, which have doubled since 2000, are showing signs of paying off as well. And Greatbatch is rolling out a new line of batteries for implantable microelectronic medical devices, which could also help recharge its revenue cycle.
Greatbatch's new technology extends the life of batteries by two to three years and can be made smaller to accommodate new, less invasive devices. Staying ahead of the competition is key to the company's long-term success, since its battery and component competitors are also its major clients, including Guidant, Medtronic
Greatbatch officials believe that its medical-component business, which is expanding beyond pacemakers to devices such as neurostimulators to relieve pain or treat incontinence and obesity, can keep pace with market growth. The microelectronic medical-device market is expected to grow by more than 20% during the next five years, according to a report from Business Communications, a publisher of technology-market research. Greatbatch also sees an upside from getting into manufacturing subassemblies for microelectronic devices.
Contributing to the sales rebound is the company's oil-industry business, which powers monitoring devices to detect pressure in oil wells. Although this niche makes up a much smaller portion of sales, revenue spurted 17% higher in the first quarter to an all-time quarterly record of $8.5 million. The increase was due in part to high oil prices and federal legislation that requires more frequent inspection of oil pipelines for safety and security reasons.
At 38 times this year's earnings estimates, Greatbatch's stock might not be for the faint of heart. But it's not out of line with the premium that the stock commanded before its heart-stopping fall -- especially if you consider that the analysts' earnings consensus for 2006 is more than 50% higher than in 2005, at $0.94 a share.
Free cash flow (cash from operations minus capital expenditures) could very well pick up in 2006 once two new plants come online and an older plant is shut down. The company spent $38 million on plants and equipment in 2004, up from about $12 million in 2003. That helped send free cash flow down to only $6.7 million last year from $42.8 million in 2003.
The company is in two industries that look solid for the future: medical and oil. In medical, the federal government's Medicare program is picking up much of the tab for the cardiac-device industry. Demand for those products is growing as society ages and gains weight. It just may be enough to keep Greatbatch's batteries charged well into the future.
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