Greatbatch, Inc. (GB) is a leading producer and supplier of batteries, capacitors, and components used in implantable medical devices through its Implantable Medical Components (IMC) business.
The company reported second quarter top-line above expectations primarily due to acquisitions and strong end-market growth. However, EPS exceeded our expectations by a penny on lower R&D spending. The management provides adjusted 2008 EPS guidance of $1.20-$1.50. Our 2008 EPS estimates increase on positive news surrounding new products and promising innovations, and diversification beyond the CRM original equipment manufacturers, now less than 50% of Q208 sales.
We note the integration risk and acquisition strategy inherent in this name which leads us to discount FY08 earnings. We do see benefits to the diversification effort and, if management is successful at integrating acquisitions and meeting its operational efficiency goals, EPS growth should benefit in 2009 and beyond. The management?s growth view on 2008 CRM/Neuro is 5%, with the Therapy Delivery segment (up 12%) and Orthopedics (up 10%) becoming the company?s growth drivers.
We maintain our Hold rating on the shares of Greatbatch. Given the expanded diversification, we believe the stock should be valued in-line to the group 2008 P/E of 25x. On our 2008 EPS estimate of $1.14, our target remains at $28.50.
