Hanger Downgraded to Sell - Analyst Blog

On May 7, 2014, Zacks Investment Research downgraded Hanger Inc. (HGR) by a notch to a Zacks Rank #4 (Sell).

Why the Downgrade?

For 2014, three estimates moved south in the last one month, with no upward revision in the same time frame, causing the Zacks Consensus Estimate to drop 5.6% to $2.04 per share. For 2015, three estimates were down in the past 7 days, leading to a 3.6% fall in Zacks Consensus Estimate to $2.39.

Hanger clocked negative earnings surprises in 2 of the last 4 quarters, with an average miss of 3.9%.

On May 5, 2014, Hanger reported its 2014-first-quarter results, which lagged estimates at both fronts. Following the earnings release, shares of Hanger dropped 10.8%.

Adjusted earnings per share of 19 cents reflected a year-over-year drop of 29.6% and lagged the Zacks Consensus Estimate of 23 cents. Revenues in the quarter inched up 2.7% to $235.6 million but fell short of the Zacks Consensus Estimate of $242 million.

Revenue growth was driven by improvement in the Patient Care segment, partially offset by a decline in the Products & Services segment revenues due to adverse weather conditions in the U.S. throughout the first quarter.

Hanger’s adjusted operating margin fell 300 basis points to 7.1% in the quarter owing to lower-than-expected sales and increased costs.

Furthermore, Hanger reported $10.0 million in cash outflow from operations led by lower operating income and increased working capital requirements.

Reflecting the lackluster first-quarter results, Hanger lowered its 2014 adjusted earnings per share guidance to a range of $2.01 to $2.11 from the prior range of $2.10 to $2.20. The Zacks Consensus Estimate of $2.04 lies within the guided range.

Hanger also slashed its 2014 revenue guidance to $1,100–$1,120 million from the previous band of $1,110–$1,130 million. The current Zacks Consensus Estimate of $1,101 million lies within the guided range.

Owing to the uncertain reimbursement environment, sequestration and RAC audits, Hanger is likely to face challenges that will pressurize its top line going forward.

Other Stocks to Consider

Some better-ranked medical product stocks include Cardica Inc. (CRDC), Enzymotec Ltd. (ENZY) and Mead Johnson Nutrition Co. (MJN). All these stocks carry a Zacks Rank #2 (Buy).

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