We are maintaining our estimates on Wright Medical Group Inc. (WMGI), which reports earnings on July 28. The Securities and Exchange Commission's (SEC) informal investigation into the industry's foreign selling practices, along with the ongoing Department of Justice (DOJ) investigation, might create some overhang in the stock. We believe the company has a solid outlook based upon recent extremity-related acquisition and large-joint product flow activity. Our target moves to $31.00.
In the first quarter 2008, Wright Medical reported hip growth of 16% worldwide. Physician acceptance for metal-on-metal appears to be continuing, versus ceramic-on-ceramic, which suggests the August 2005 launch of the A-Class Advanced Metal Low Wear Metal-on-Metal hip continues to make inroads. In February 2008, the company introduced Supercap, a total hip arthroplasty surgical technique that does not require the hip to be dislocated during the procedure. Extremities rose 57% in the first quarter 2008. Management expects growth in excess of 30% in extremities for 2008.
But the failure to introduce or acquire new products, competition from larger competitors, and government reimbursement rates pose the biggest risks to growth. Growth in hips, an original growth driver for WMGI, has also been harder to achieve due to weak pricing and competition. Domestic hip growth was only 4% in Q108, primarily reflecting hip resurfacing product introductions by competitors, and some pricing issues. International sales, a strong growth driver in recent years, may be hampered as Japan cuts reimbursement rates by 6% to 7%.
Read the full analyst report on WMGI
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