Guidant Upgraded After Warning

A day after Guidant ( GDT) lowered earnings guidance and announced that it was restructuring its stent business, shares rose 2.7% as a pair of Wall Street brokerages recommended buying its battered shares.

With Guidant shares off 16% so far this year and down 30% from their high, analysts at Citigroup Smith Barney and Piper Jaffray upgraded shares of the company, telling investors that the worst was likely behind the medical device maker. Citigroup upgraded the company to hold from sell, while Piper Jaffray upgraded the stock to outperform from market perform, sending shares up $1.35 to $51.90. (Both brokerages do and seek to do business with the companies covered in research reports.)

"The bad news is in the stock," said Thomas Gunderson, analyst at Piper Jaffray, in his research note. "The cardiac defibrillator market has to be split three ways now and competitive drug-eluting stents are here to stay while Guidant's programs still have some risk. But looking forward, we think that Guidant starts to pull itself out of the valley."

In Gunderson's view, Guidant's new line of cardiac defibrillators due out this fall, will increase its competitiveness against St. Jude Medical ( STJ). In the second quarter, sales of Guidant's implantable cardioverter devices, or ICDs, were a notable bright spot, coming in at $456 million, up 21% year-over-year and $27 million ahead of Wall Street's consensus.

And while the company's stent division has had its problems, Gunderson believes that ultimately, "metal stents will find their economic niche." But in the meantime, Guidant's metal stents are falling behind because of increased acceptance of drug coated ones sold by Johnson & Johnson ( JNJ) and Boston Scientific ( BSX), which ran into a major setback in being forced to expand a recall of its Taxus stents after manufacturing defects.

In the second quarter, the company's stent sales came in at $231 million, down 29% year-over-year, and $22 million lower than analyst expectations. As a result, Guidant announced a plan to restructure the business and take a $50 million to $70 million charge in hopes of cutting costs by $100 million a year, but analysts are growing concerned about the fate of its Champion drug soaked stent now in development.

"The size of the charge and annual cost savings suggest Guidant is cutting deeply into its VI division," said Matthew Dodds, analyst at Citigroup Smith Barney. "The sharp reduction in VI sales indicate a rightsizing is necessary, it does cast another pall over this division post after the recent delay in the Champion drug eluting stent timeline."

While both analysts admitted that Guidant's business fundamentals, especially in the stent business, have room for improvement -- both feel shares are worth buying from a valuation perspective. After releasing a slew of bad news in recent weeks, no news is good news, according to Dodds.

"Now that just about all of the concerns we previously voiced have occurred, we don't see that much left to weigh on the stock," said Dodds.

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