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Analysis: SMTS has some more energy left


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Company Profile:

Somanetics Corporation, incorporated in 1982, develops, manufactures and markets the In Vivo Optical Spectroscopy (INVOS) System, a non-invasive patient monitoring system that continuously measures changes in the blood oxygen levels in the brain and elsewhere in the body in somatic, or skeletal muscle, tissue in patients with or at risk for restricted blood flow. The INVOS System consists of a portable monitoring system, including software, which is used with SomaSensors. During the fiscal year ended November 30, 2007, (fiscal 2007) the Company had an installed base of 2,006 INVOS System monitors in the United States in 664 hospitals, and during fiscal 2007, the Company sold approximately 371000 SomaSensors. In addition to the INVOS System, Somanetics also develops and markets the CorRestore System, which includes a cardiac implant, which is called the CorRestore Patch, for use in cardiac repair and reconstruction, including heart surgeries called surgical ventricular restoration.

Sales and Cash Flow:

Quarterly Income:

Margins:

Quarterly
(May ‘08)
Annual
(2007)
Annual
(TTM)
Net Profit Margin 23.96% 25.09% 22.56%
Operating Margin 31.86% 28.31% 27.05%
EBITD Margin - 30.39% 29.10%
Return on Average Assets 12.46% 9.81% 10.34%
Return on Average Equity 12.76% 10.07% 10.57%

Ownership:

Shares Outstanding 12.00 Mil
Institutional Ownership (%) 70.45
Top 10 Institutions (%) 38.30
Mutual Fund Ownership (%) .29
5%/Insider Ownership (%) .84

Technical Analysis:

The stock’s overbought in recent times and can be explained by the bullish trend in the recent months. It broke through it’s 80-day resistance level ($23.80) during trading today. Seems like the bullish trend continues and it’s still rallying. The stock has a low beta and is robust to market voliatility, which is a plus.

My decision:

Most stocks in the medical equipment industry have been growing revenue and earnings over the past 3years. SMTS has done better than most of its peers as far as top-line growth is concerned. Its growth rate is much higher than its EPS growth rate. implying sufficient cash flow to fuek future growth. It has zero debt, 51M in cash (remember its earnings are only around 10M a year indicating fiscal responsibility. It’s short ratio is 4, indicating an upward trend in the future. So far, so good.

Per my computations the value of the stock should be between $38-43. However, the technical indicators are mized. Often times overbought stocks tend to drop in price when buyers start dumping them to rejuvenate their cash flows. It’s PE ratio is twice the industry average but then again it’s a small-cap. aggressive growth stock. It definitely has some more life in it before the rally stalls. It’s a short-term BUY for my porfolio

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