Thoratec: A Strong Buy

Zacks

Potential growth prospects in the Destination Therapy (:DT) market and raised guidance have helped Thoratec Corp. (THOR), provider of mechanical circulatory support devices, achieve a Zacks #1 Rank (Strong Buy) on October 03, 2012. Moreover, the company has delivered positive earnings surprises in three of the last four quarters with an average beat of 8.01%.

With a decent one-year return of 11.2% and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Attractive growth opportunity in the DT market, margin and product expansions, solid performance in international markets, along with raised guidance – are the primary rank drivers for this stock.

Ventricular Assist Devices (:VAD) and DT represent a multi-billion dollar opportunity for Thoratec. The company till now enjoys a monopoly in the U.S. market with its DT’s HeartMate II offering. The device faces no near-term competitive threat as HeartWare International Inc.’s (HTWR) HeartWare Ventricular Assist Device (:HVAD) System is not expected to be launched before 2015 or so.

Moreover, Thoratec has benefited from rapid acceptance of DT’s HeartMate II on a global basis. The HeartMate II business grew 22% in the last six months, capping off the strongest six months financial performance in the company's history. In addition, VAD represents a substantial market opportunity for Thoratec due to changes in demographic trend.

Thoratec constantly attempts to achieve its strategy of margin expansion. The company’s gross margin improved in successive quarters on the back of favorable volume, mix and acquisitions. Management expects this trend to continue as it benefits from the growth momentum. It forecasts adjusted gross margin to be about 71.5% for 2012. This reflects the improvement in utilization on the back of growth of the HeartMate II product line.

Thoratec has a proven track-record in research and development (R&D) in expanding its product portfolio. The company is currently developing its next generation HeartMate III for which it will avoid first-in-man trial. Instead, the company will target CE Mark approval in Europe (expected in mid 2013) followed by clinical trials in the U.S. before the end of 2013. Next generation HeartMate devices are expected to be accretive to the company’s growth in the long-term.

Further, Thoratec continues its solid performance in the international market. The contagion of economic problems in Europe did not have any significant impact on the most recent quarter’s performance. Additionally, the company expects regulatory approval in Japan by the end of 2012, which will enable it to serve one of the high value markets for its products.

Recently, Thoratec revised its financial forecast for 2012. The company expects revenues between $460 million and $470 million compared with the prior guidance of $452 million and $467 million. For 2012, adjusted earnings are expected to be between $1.67 and $1.73, compared with the prior guidance of $1.62 and $1.72.

The updated guidance includes higher sales estimates for the HeartMate product line, in the range of $10 million to $15 million, partially offset by lower sales estimates for the Paracorporeal Ventricular Assist Device (:PVAD) product line and foreign exchange impact of $7 million.

However, Thoratec is facing stiff competition from Australian heart pump maker HeartWare International. HeartWare is awaiting approval from the U.S. Food and Drug Administration (:FDA) for its Ventricular Assist System for a Bridge-to-Transplant (BTT) indication, challenging Thoratec’s dominance in the BTT space. The product is likely to receive approval later in the second half of 2012, which will result in a slower growth profile for Thoratec.

Earnings Estimate Revision

The Zacks Consensus Estimate for 2012 remained unchanged at $1.49 over the last 30 days. For 2013, Zacks Consensus Estimate is $1.58, reflecting a 0.6% increase over the year-ago earnings per share.

Valuation

The company’s strong fundamentals justify the premium valuation of the stock. Thoratec currently trades at a forward P/E of 24.04x, a 10.7% premium to the peer group average of 21.72x. Moreover, the price-to-sales ratio of 4.61x is at a 22% premium to the peer group average of 3.78x.

Thoratec has a trailing 12-month ROE of 14.5% compared with the peer group average of 15.1%.

About the Company

California-based Thoratec Corporation is a leading developer of innovative devices for advanced heart failure. Founded in 1976, the company offers employment to about 800 people worldwide. With a market capitalization of roughly $2.11 billion, Thoratec owns manufacturing facilities across the U.S., U.K. and Switzerland.

Other Zacks #1 Rank (Strong Buy) medical devices stocks include Hologic Inc. (HOLX) and Align Technology Inc. (ALGN).
 

Read the Full Research Report on ALGN

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Read the Full Research Report on HTWR

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