MONOPOLY PLAY
SMTS
I run my stock screen and this stock pops out. I remembered looking into this one, but not in great deal of details. Now I have a lot of time, and I dig a bit further, and surprise, this appears to be an excellent company, although valuation appears to be rather high.
The first thing I really like is that it is a monopoly. There is practically no competition in the market place, and it is the only game in town. It is the proud owner of the only Oximeter in the USA, and internationally. They have the absolute pricing power, and that is why they command a gross profit margin as high as 87% for the first three quarters of FY05 (November year end). Secondly, the sensor, which is a part of this Oximeter, is one-use only, which means reoccurring revenues. Third, the market is huge. The company estimates that the market size in the US is about $2.0 billion, and the company’s FY05 revenues are only 20 million, 1% penetration ratio. Up to Q3/05, the install base is at 985 and there are thousands of hospitals in the USA, not to mention Canada, Europe and Japan. The company’s revenues could go up to $200 million (a 10-bagger), the market penetration will remain 10%. Fourth, the company is growing Googlishly, with more than 60% top line and more than 100% of its bottom line and EPS. The company has more $1.0/share in cash and no debt. It is generating positive cash flow from operations and free cash flow positive. With a monopoly product, strong growth, positive cash flow, and relatively small size, this is an ideal take-over target, and I won’t be surprised if someone pops up the question.
While valuation is not cheap, it is certainly not in the league of Google. It is currently traded at 56X of its FY05 guidance. I conservatively estimate that it will make about 0.68/share in FY06, which leads to a multiple of 33X, and a PEG about 0.47. This compares to about 100X for Google. More importantly, I believe this company is at the very early stage of growth and its growth rate will unlikely slow down for a few years. Given that, I believe the valuation is reasonable as long as it maintains its growth rate in the next couple of years. The company will release its Q4/05 earnings on January 31, 2006 and will provide guidance for FY06. I believe Q4/05 results are in the bag because management raised its full year guidance in its Q3 release. I also believe the guidance for FY06 will be strong, which will move the stock to lower 30s. It has drifted downward in the last few days, which gives me an opportunity to buy at currently level.
Sold JPM (38.50) and put an order for SMTS (filled at 26.35).
I run my stock screen and this stock pops out. I remembered looking into this one, but not in great deal of details. Now I have a lot of time, and I dig a bit further, and surprise, this appears to be an excellent company, although valuation appears to be rather high.
The first thing I really like is that it is a monopoly. There is practically no competition in the market place, and it is the only game in town. It is the proud owner of the only Oximeter in the USA, and internationally. They have the absolute pricing power, and that is why they command a gross profit margin as high as 87% for the first three quarters of FY05 (November year end). Secondly, the sensor, which is a part of this Oximeter, is one-use only, which means reoccurring revenues. Third, the market is huge. The company estimates that the market size in the US is about $2.0 billion, and the company’s FY05 revenues are only 20 million, 1% penetration ratio. Up to Q3/05, the install base is at 985 and there are thousands of hospitals in the USA, not to mention Canada, Europe and Japan. The company’s revenues could go up to $200 million (a 10-bagger), the market penetration will remain 10%. Fourth, the company is growing Googlishly, with more than 60% top line and more than 100% of its bottom line and EPS. The company has more $1.0/share in cash and no debt. It is generating positive cash flow from operations and free cash flow positive. With a monopoly product, strong growth, positive cash flow, and relatively small size, this is an ideal take-over target, and I won’t be surprised if someone pops up the question.
While valuation is not cheap, it is certainly not in the league of Google. It is currently traded at 56X of its FY05 guidance. I conservatively estimate that it will make about 0.68/share in FY06, which leads to a multiple of 33X, and a PEG about 0.47. This compares to about 100X for Google. More importantly, I believe this company is at the very early stage of growth and its growth rate will unlikely slow down for a few years. Given that, I believe the valuation is reasonable as long as it maintains its growth rate in the next couple of years. The company will release its Q4/05 earnings on January 31, 2006 and will provide guidance for FY06. I believe Q4/05 results are in the bag because management raised its full year guidance in its Q3 release. I also believe the guidance for FY06 will be strong, which will move the stock to lower 30s. It has drifted downward in the last few days, which gives me an opportunity to buy at currently level.
Sold JPM (38.50) and put an order for SMTS (filled at 26.35).
posted by ZIGZAG at 1/25/2006 04:09:00 PM
0 Comments:
Post a Comment
<< Home