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HCA Holdings Inc. (NYSE:HCA), the biggest U.S. for-profit hospital operator, saw revenue rise 6.8% last quarter thanks to 3.3% growth in same store admissions. This is good news for medical device makers, including Greatbatch Inc. (NYSE:GB).
Greatbatch's clients are the biggest names in medical devices and equipment, with Boston Scientific (NYSE:BSX), Johnson & Johnson (NYSE:JNJ), Medtronic (NYSE:MDT) and St. Jude (NYSE:STJ) accounting for 60% of Medical segment sales last quarter. Those stocks benefit from increasing utilization, which drives healthcare provider equipment and device demand and investment. Greatbatch's devices are found in their products across cardiac, neurology and orthopaedics.
During the recession, hospital and provider spending was curbed as weak consumer confidence, falling commercially insured populations and job loss cut admissions, elective surgeries and primary care visits. As a result, clients cut back orders for Greatbatch's batteries, capacitors, enclosures, instruments and hip and knee replacement related products.
But, the economy is improving and job loss has shifted to growth. As a result, medical device makers are seeing revenue and unit volume rise and that's sparking demand for Greatbatch. Last quarter, revenue increased 13% to $148.8 million. Over the past four quarters, Greatbatch has beaten street estimates three times, prompting analysts to boost 2012 expectations to $1.84 from $1.80 over the last ninety days.
However, short sellers remain unconvinced, holding 14 days to cover short, and that's potentially good news for investors-- particularly if orthopaedic, vascular access and electrochem sales growth can continue their winning ways. In Q1, those three grew 34%, 28% and 19% respectively, offsetting flat revenue in its mature cardiac and neuromodulation markets.
The fast growing product lines have resurrected cash flow, which rose 18% from last year to $25 million in Q1. In 2010, cash flow rose to $63 million, well above the $13 million it generated in 2008. And, the company has deployed the cash wisely, as debt has dropped from $335 million in 2008 to $225 million.
While the company expects its workhorse cardiac and neuromodulation businesses to be stable to low digit growers, it sees a lot of upside in orthopaedic, which had its highest quarterly revenue in three years in Q1. The company is estimating its vascular access revenue, powered by introducers, will grow 10-20%. It sees even greater opportunity in future OEM and Greatbatch branded products, which will help fuel 50-100 basis points of operating improvement annually.
Greatbatch also has international upside given it already generates 34% of revenue in Europe but only 3% in the rest of the world. Its R&D investments include products targeting gastric stimulation to treat obesity and products treating sleep apnea, which affects 15-30 million people in the United States.

Given improving trends in commercial insurance enrollment and job growth, new OEM products, future branded products and rising international sales, investors can profit from buying Greatbatch before rising revenue and profits force shorts to cover.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GB over the next 72 hours.

Source: Greatbatch Inc.: Investors Will Profit as Rising Hospital Admissions Increase Sales