A Recession-Proof Small Cap?

01/21/2009 11:00 am EST

Focus: STOCKS

Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Ian Wyatt, editor of Growth Report, says a small medical supplier makes devices doctors need in good times and bad.

ICU Medical (Nasdaq: ICUI) develops disposable medical connection systems for use in vascular therapy applications. The company's devices are designed to protect patients from catheter-related bloodstream infections and health care workers from exposure to infectious diseases through accidental needle sticks. ICU Medical also manufactures critical-care medical devices such as angiography kits and cardiac monitoring systems. 

ICU Medical's intravenous systems, safe needles, catheters, pressure monitoring, and blood sampling devices are essential. Regardless of the state of the economy, doctors use these products on patients. This makes the company less affected by consumer consumption trends and more recession proof.

The company avoids entering saturated markets. Instead, ICU Medical searches for empty markets, or markets with very little competition. This approach allows for stability in sales and margins.

Starting in 2009, Premier (an operator of health care purchasing networks) will market products from ICU Medical. This deal will allow the firm access to 2,000 hospitals and 50,000 other sites it could not previously reach.  The company also will be building a plant in Slovakia. This plant, along with the plant in Italy, allows ICU Medical a shorter supply line to assist expansion in Europe.

Last October, ICU reported revenue increased 22% to $54.7 million in the third quarter , [while] net income was $7.6 million, or 52 cents per diluted share, compared with net income of $4.7 million, or 31 cents per diluted share, in [the same quarter of] 2007. 

ICU Medical increased its revenue guidance for full-year 2008 to $199 million to $203 million, compared with the previously announced $190 million to $200 million. In addition, the company [raised its] diluted earnings per share estimates for 2008 to a range of $1.48 to $1.53, [above] with the previously announced $1.35 to $1.45 per diluted share. 

Earnings have been positive but choppy for the past three years. Most of that volatility can be attributed to an acquisition of a plant from Hospira in 2005. In order to fix this problem, management refocused their sales force.

We expect to see smoother revenue and earnings streams in the coming quarters. Although our estimates are on the high end, we think ICU Medical will achieve our targets. The stock trades at 16x our forward-year estimate of $1.90. Using our projections and a fair value multiple of 19.5x our forward-year EPS estimate, we calculate a target price of $37.

The stock has been relatively stable despite a few choppy weeks in October and November of 2008. More recently, it has been consolidating between $30 and $33. Shares will hit strong resistance at $35. (It closed above $30 Tuesday—Editor.) If ICU Medical can break past $35, the stock will reach our target price of $37 very soon after.

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