Hanger Remains “Outperform” - Analyst Blog

We reiterate our Outperform recommendation on Hanger Orthopedic (HGR). We believe, at the current level the stock offers an attractive entry point for investors considering healthy earnings growth visibility.

Second-quarter fiscal 2010 adjusted earnings beat the Zacks Consensus Estimate by a penny and rose 19% year over year on the back of higher sales. Hanger continues to succeed in expanding its top line on a quarterly basis led by higher same-center sales at patient care centers, greater demand for the company’s distribution segment and acquisitions. The company also witnessed an expansion in operating margins, helped by its cost management initiatives.

Hanger is the market leader in the orthotic and prosthetic (O&P) patient care services market, operating through 678 patient care centers across the U.S. The company operates four business units: patient care, distribution, Linkia and Innovative Neurotronics.

Linkia remains a significant growth engine for Hanger. It is the first managed care organization dedicated solely to the O&P market. This strategy is helping Hanger gain market share and rationalize pricing in a highly fragmented market. Innovative Neurotronics developed WalkAide, an electrical stimulation device to treat stroke-related drop foot. Extended reimbursement coverage (expected in 2012) for the device will offer a major long-term growth impetus for Hanger.

Hanger’s economies of scale are unmatched by its competitors, which include notable players in the O&P space such as Orthofix International (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI).

To expand its geographic presence, Hanger continues to pursue small tuck-in acquisitions. The company remains on track to complete its planned acquisitions in 2010, which will add roughly $20 million in annual sales. The company is funding these acquisitions with internally generated cash flows.

Hanger is relocating (expected to complete in third-quarter) its corporate headquarters from Bethesda, Maryland, to Austin, Texas. While, costs associated with corporate relocation are expected to dilute earnings in the third quarter, Hanger is poised to achieve meaningful cost synergies from such initiatives. Moreover, Hanger should benefit from the extended health coverage provided by the Congress.