This Little-Known Orthopedic-Device Stock Is Delivering Huge Returns

You might not have heard of Exactech  (EXAC) , but this stock is the top performer in the orthopedic products sector this year, outpacing larger, more well-known and diversified medical giants such as Johnson & Johnson, Smith & Nephew, Zimmer Biomet and Stryker.

Gainesville, Fla.-based Exactech has gained 53% so far this year, vs. an average of only about 14% for its cohorts.

How has Exactech accomplished its share gains this year, overcoming little Wall Street exposure (only three analysts cover the stock currently), a short company history, and limited resources to spend on new research and development or acquisitions for product-line extensions? We'll examine the recent story of this stock.

Revenue momentum and improved margins are driving growth at Exactech. For the second quarter, the company reported an 8% year-over-year increase in revenue to $66.1 million, led by an 18% increase in sales of extremity orthopedic implants (primarily shoulders) and a 13% increase in sales of hip implant products. Gross margin also improved, to 69.3% from 68.6% in the year-earlier quarter, contributing to a jump in earnings per share to 31 cents from 26 cents. The first quarter also showed revenue growth, at 6%, with earnings per share up to 31 cents from 29 cents a year earlier.

The company's outlook shows that it's gaining momentum. When it released second-quarter results, management increased revenue guidance for all of 2016, by about 1%, to $253-$258 million, or a 5%-8% year-over-year increase. It also raised the lower end of its full-year earnings guidance range, to $1.15 -$1.19 per share, vs. $1.04 in 2015.

Fueling positive results this year for Exactech are new products and the recent launch of three revision systems for replacing older implants. Revenues for the three largest market segments, hip, knee and shoulder implants, are all up this year.

As a smaller company, Exactech has made its mark as a nimble, physician-oriented device maker (its co-founders were an orthopedic surgeon and a biomechanical engineer), and revision systems allow Exactech to gain market share at the expense of larger, older companies, even when a patient has already received a product from another company.

Also helping results this year are an increased emphasis on making its own product components, rather than outsourcing them, and increased international sales, due to the February 2016 acquisition of Exactech's Australian distributor and to positive foreign exchange factors.

What will continue Exactech's share price momentum going forward? Look for new products in the near future, most notably the Vantage ankle system, which is set to launch later this year into the high-growth (8% estimated per year) Extremities market, already Exactech's largest segment.

The Company's new ExactechGPS computer-assisted surgery system is also set to expand into the shoulder and other markets, which will provide new ancillary revenue as well as boost sales of orthopedic implants.

Lastly , Exactech has a history of making smaller, product-oriented acquisitions, for example 2015's purchase of Blue Ortho SAS of France for the guided-personalized surgery (GPS) technology, and the company could do more of these in the near future.

Exactech has approximately $130 million remaining on a $150 million line of credit, and the company could step up to make a larger purchase, possibly in a new medical or geographic area. On the flip side, Exactech, although still family-owned and managed, could itself be attractive to a larger medical products company, perhaps a foreign-based company or one looking to get into the orthopedics area through the acquisition of a well-rounded yet innovative player.

This article is commentary by an independent contributor. At the time of publication, the author held positions in Johnson and Johnson.

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