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TSC Ratings' Updates: Thoratec

Not only is the stock trading higher than it was a year ago, its rise has outperformed that of the S&P 500 over the same period, despite its weak earnings results. The stock's price rise over the last year has driven it to a level that is somewhat expensive compared with the rest of its industry, but we feel that other strengths this company displays justify these higher price levels.

We've upgraded Thoratec (THOR), which manufactures circulatory support products for use by patients with heart failure, from hold to buy, driven by its robust revenue growth, largely solid financial position with reasonable debt levels by most measures, compelling growth in net income, good cash flow from operations and expanding profit margins. We feel these strengths outweigh the fact that the company is trading at a premium valuation based on our review of its current price compared to such things as earnings and book value.

Revenue rose by 44.2% since the same quarter last year, outperforming the industry average of 15.4% growth and helping boost EPS. The current debt-to-equity ratio, 0.3, is low and is below the industry average, implying successful management of debt levels. The company also maintains a quick ratio of 5.99, which clearly demonstrates the ability to cover short-term cash needs. Net income increased by 610% since the same quarter a year ago, significantly outperforming the S&P 500 and the health care equipment and supplies industry. Net operating cash flow has significantly increased by 111% to $11.9 million when compared with the same quarter last year, vastly surpassing the industry average cash flow growth rate of 21.35%. The company's gross profit margin of 64.8% is rather high, having increased from the same quarter the previous year, though its net profit margin of 8.9% significantly trails the industry average.

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