Biomet

(BMET)

, a leader in hip and knee implants, is acting a little more flexible.

Unable to meet fourth-quarter expectations -- or sustain its rapid-fire growth rate -- Biomet is now rewarding shareholders with a larger dividend and stock repurchase program instead. The company hiked its dividend by 25% to 25 cents a share and laid out plans to repurchase 2.5 million shares, "irrespective of market conditions," when releasing details of a fourth-quarter shortfall on Thursday.

Biomet's fourth-quarter revenue grew by 13% to $503 million instead of the $520 million Wall Street had originally anticipated. Meanwhile, the company's fourth-quarter operating profits, while up 14% to 42 cents a share, simply matched the recently lowered consensus estimate. Operating income increased 10% to $105 million.

Biomet had already warned of a fourth-quarter slump a week ago. When offering details on Thursday, the company applauded its core reconstructive business and blamed the slowdown on its struggling Excellence by Innovation, or EBI, spine division.

During the latest quarter, reconstructive sales jumped 13% on a constant currency basis. Still, some analysts had expected more. Hip sales increased by just 7%, and even knee sales, which rocketed by 18%, grew at a much slower rate than usual.

Biomet focused on the familiar problems in its EBI division instead. It also promised a long-awaited turnaround -- led by new EBI President Bart Doedens -- going forward.

"During the fourth quarter of fiscal year 2005, Biomet's reconstructive devices continued to expand at market-leading growth rates," Biomet CEO Dane Miller pointed out. "However, EBI's fixation, spinal stimulation and soft goods and bracing products continued to underperform management's expectations ... (Still), we are confident that Dr. Doedens will provide the leadership capabilities necessary to position EBI as a leader in the spinal and fixation marketplaces."

Miller went on to say that Biomet feels optimistic about its future product launches and, as a result, remains comfortable with Wall Street's profit forecasts for both the coming quarter and fiscal year. Those estimates currently stand at 41 cents a share and $1.80 cents a share, respectively.

Biomet's stock gained 1.5% to $35.10 on Thursday's financial update.

Weak Spine

By the time Biomet laid out its new plans, however, First Albany analyst William Plovanic had already downgraded the stock from buy to neutral.

Plovanic based his action on both the fourth-quarter shortfall and information gathered during a recent visit to the company. In a nutshell, Plovanic is convinced that the EBI turnaround will take at least three quarters to execute and that, in the meantime, new initiatives for growth have already been baked into company estimates. Thus, he believes the stock will trade sideways over the next few quarters and recommends that investors remain on the sidelines while it does.

First Albany makes a market in Biomet securities.

Bear Stearns analyst Milton Hsu blames EBI's poor performance on two major problems. First, he says, moving the fixation business into that division has taken "significantly longer" than he ever suspected. Second, he adds, an estimated 50% of EBI's sales come from an electrical stimulation market that seems to be slowing down.

For a real turnaround, Hsu believes, EBI must smooth out all of its manufacturing and salesforce problems and, moreover, roll out a large number of successful new products in the future.

Meanwhile, Hsu also foresees potential threats to Biomet's core hip and knee business. Specifically, he questions whether the company can sustain steady price increases on its existing products, and he even raises some concerns about new product launches as well.

"Two recently launched Biomet hip products could help accelerate U.S. hip sales going forward," Hsu says, "although the increasingly cost-conscious U.S. health care environment could make the sales pitch a bit more difficult."

In the meantime, Hsu says, Biomet's knee business, though still among the fastest-growing in the industry, faced tough year-over-year comparisons this quarter.

Hsu has a peer-perform rating on Biomet's stock. His firm does and seeks to do business with the companies it covers.

Soft Core

Sanford C. Bernstein & Co. analyst Bruce Nudell skips right past EBI's longstanding problems to address potential challenges in the core reconstructive business instead.

For starters, Nudell calls Biomet's fourth-quarter hip growth "sluggish" and predicts that the company will need more than its two new premium hips to "escape eroding world-wide hip fundamentals." He calls the European hip market "highly penetrated" and the Japanese market "anemic." Meanwhile, he notes, Biomet faces pricing pressures in its crucial market at home.

Nudell points to weaknesses in Biomet's rapidly growing knee business, as well. In recent quarters, he concedes, knee sales have been increasing at a "blistering pace." However, he believes the price/mix contribution that helped boost that growth now looks unsustainable going forward.

Thus, Nudell remains cautious on Biomet -- which is smaller than some of its peers -- along with the industry overall. In a special "risk" section of his latest note, he also warns that he may not be quite cautious enough.

"We feel that BMET's relatively small U.S. footprint somewhat mis-positions the company in an environment in which providers are seeking to consolidate purchasing power in order to gain supply cost concession," he writes in a research note. And "it could be that provider/payor activism with regards to curbing supply cost inflation results in a harsher price/mix environment than we've modeled." Bernstein makes a market in Biomet securities.