Hanger Orthopedic Upgraded

We recently upgraded Hanger Orthopedic Group, Inc. (HGR: 18.14 -0.27 -1.47%) to an Outperform with a target price of $21 based on a P/E of 16.4x our fiscal 2010 EPS estimate of $1.28. 

Hanger recently reported a strong fourth quarter and full fiscal 2009 results. For the fourth quarter, earnings per share were 37 cents, beating the Zacks Consensus Estimate of 36 cents and the year-ago earnings of 26 cents. For fiscal 2009, earnings per share were $1.13, higher than the year-ago earnings of 86 cents. 

Net sales for the fourth quarter increased 10.6% year over year to $205.1 million. Growth can be primarily attributed to higher same-center sales of patient care centers, higher demand for the company’s distribution segment and acquisitions. 

Hanger witnessed an expansion in margins in the fourth quarter. Gross margin increased 60 basis points (bps) year over year to 71.0%. Operating margin increased 160 bps year over year to 13.4%. 

In fiscal 2009, total revenues increased 8.1% year over year to $760.1 million. Patient-care services and distribution segments contributed 88.2% and 11.6% to total 2009 sales, respectively. 

In terms of payor mix: Commercial and other, Medicare, Medicaid and VA contributed 59.5%, 29.1%, 6.2% and 5.2% to fiscal 2009 sales, respectively. 

Hanger Orthopedic is the global premier provider of orthotic and prosthetic patient care services. Hanger competes with Orthofix International NV (OFIX: 34.47 +0.35 +1.03%), Conmed Corp. (CNMD: 22.29 -0.10 -0.45%), Exactech Inc. (EXAC: 17.48 -0.01 -0.06%) and Owens & Minor Inc. (OMI: 46.40 +0.16 +0.35%) in the orthotic and prosthetic space.