Trading is not a game of exacts. Perfectionists need not apply. Markets are made up of many irration...
ICU: A Healthy Selection
02/24/2006 12:00 am EST
Quantitative analyst Vahan Janjigian uses a proprietary model to find stocks with the greatest potential. From that list, the ten with the lowest expected market risk form his conservative model portfolio. A recent addition to the top ten is ICU Medical.
"ICU Medical (ICUI NASDAQ) makes safe and disposable intravenous (IV) systems and related products designed to protect users from accidental needle pricks. CLAVE, the company’s largest product offering, produced 40% of 2005 sales. It is a proprietary one-piece IV connector with an innovative design that allows for the connection and supply of fluids without the use of a hollow-bore needle. Critical care products include catheters, angiography kits, and cardiac monitoring systems.
"ICUI has expanded its product lines in recent years and focused more on the custom IV market. For example, the company acquired Bio-Plexus and its Punctur-Guard product in 2002. This acquisition allowed ICUI to offer complete IV systems rather than just certain components. Also, the company has been focusing on reducing manufacturing costs. This became apparent with the May 2005 purchase of a manufacturing facility in Salt Lake City from Hospira—its single largest customer.
"The agreement calls for Hospira to take delivery of all products manufactured at this plant, and to take responsibility for selling, marketing, and distributing these products. This combination of low-cost production and an expanding product base has delivered excellent financial results. Net sales for 2005 more than doubled to $157.5 million. Even ignoring Hospira’s contribution, sales were up 47% spurred by strong demand for CLAVE and custom IV systems.
"Further, growth is accelerating. Fourth quarter net sales almost tripled to $46.5 million. The overall gross profit margin improved from 40% to 41% during the same period. ICUI benefited from a significant drop in operating expenses from 53% of total revenues to just 27%. Fourth quarter net income came in at 38 cents per share, which compares to a loss of 11 cents a year earlier. Yet investors dumped the stock because revenues fell slightly below expectations.
"Although extremely beneficial, the Hospira relationship represents a key investment risk because Hospira produced 73% of ICUI’s 2005 revenues. However, value-added technologies and the ability to deliver complete and custom systems gives ICUI a competitive advantage. ICUI is also committed to leveraging cash flows to further enhance efficiencies. Indeed, it recently announced plans to shift molding and assembly operations from San Clemente to Salt Lake City. Such cost-reducing actions coupled with strong demand should result in accelerated margin improvement and robust earnings growth."
The key risk-on and off drivers today are the same – U.S. politics, global growth, other centr...
Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...