We reiterate our ‘Outperform’ rating on Hanger Orthopedic Group, Inc. (HGR) with a target price of $21 based on a P/E of 16.4x our fiscal 2010 EPS estimate of $1.28. The company’s results for the first quarter fiscal 2010 were outstanding with growth witnessed across all parameters.

Hanger reported first quarter fiscal 2010 earnings per share of 16 cents, in line with the Zacks Consensus Estimate and higher than the year-ago earnings of 14 cents.

Net sales for the first quarter increased 5.4% year-over-year to $178.3 million. Growth can be primarily attributed to higher same-center sales at patient care centers, higher demand for the company’s distribution segment and acquisitions.

Patient-care services and distribution segments contributed 87.5% and 12.2% to total sales, respectively. In terms of payor mix: Commercial and other, Medicare, Medicaid and VA contributed 59.4%, 28.3%, 6.8% and 5.5% to total revenues, respectively.

Hanger witnessed an expansion in margins in the first quarter. Gross margin increased 10 basis points (bps) year-over-year to 69.9%. Excluding the office relocation cost, adjusted operating margin increased 20 bps year-over-year to 9.1%.

Hanger has retained its earlier revenue and earnings per share guidance for fiscal 2010. The company expects total revenues in fiscal 2010 to range between $815 million and $825 million, an increase of 7.2% to 8.5% year over year. Earnings per share are projected in the range of $1.27 to $1.29, an increase of 12.4% to 14.2% year over year.

Furthermore, Hanger expects to incur additional severance and relocation costs of roughly $8 million to $10 million, and lease exit cost of roughly $3 million to $5 million for the relocation of its corporate headquarters. The company expects an annual reduction in operating expenses of approximately $2.5 million to $3.5 million as a result of the relocation.

Hanger is a global premier provider of orthotic and prosthetic patient care services. The company competes with Orthofix International NV (OFIX), Conmed Corp. (CNMD), Exactech Inc. (EXAC) and Owens & Minor Inc. (OMI) in the orthotic and prosthetic space.

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