Hanger Retained at Neutral

Zacks

We reiterate our Neutral recommendation on Hanger Inc (HGR) following its second quarter results which surpassed the Zacks Consensus Estimates.

The company’s adjusted earnings of 50 cents per share exceeded the year-ago earnings of 45 cents per share. Revenues rose 7.2% year over year to $251.8 million in the quarter. Profits improved 12.7% to $17.4 million, helped by higher sales and cost control measures.

Hanger reiterated its revenue guidance for 2012 despite reimbursement and regulatory headwinds. On the earnings front, the company raised the lower end of its guidance and now expects adjusted earnings per share in the range of $1.75 to $1.79 (earlier $1.72 to $1.79) for 2012. Hence, there exists a scope for multiple expansion.

Headquartered in Austin, Texas, Hanger is the market leader in the O&P market. Its wide portfolio serves a $4.6 billion market where the traditional O&P market is worth $2.6 billion. Other notable players in the O&P space are Orthofix International (OFIX) and Exactech Inc. (EXAC). Being the leading player, the company has economies of scale unmatched by its competitors.

Hanger continues to expand its revenues on a quarterly basis, supported by healthy contributions from the company’s patient care and distribution segment and acquisitions. We expect this uptrend to continue in the future reporting periods, backed by multiple growth drivers. Internal growth drivers such the company’s subsidiary, Linkia accompanied with external factors favor accelerated growth in the years ahead.

The company continues to explore acquisitions to boost its geographic footprint and revenues. Hanger’s acquisitions are specific to location, quality of practitioners, and product/service mix. Given the scale of administrative and regulatory headaches smaller practitioners face, they often approach Hanger requesting it to explore options for their purchase.

The industry in which Hanger operates is highly disintegrated. As a result, the company faces intense and fragmented competition despite its overweighing market position. This includes both pricing and referral competition. We are also wary about the reimbursement uncertainties and the macroeconomic issues. Despite our concerns, the stock has significant upside potential.

Hanger currently carries a short-term Zacks #2 Rank (Buy).

Read the Full Research Report on HGR

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Read the Full Research Report on EXAC

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