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Saturday, 6 January 2007
Kyphon (KYPH) "Weekend Trading Portfolio Analysis"

 

 

 

 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisors prior to making any investment decisions based on information on this website.  

One of the things I like to do on this website is to share with you investing ideas that meet my own criteria for stocks.  In addition, I invest in some of the many stocks I discuss.  I try very hard to provide transparency about what I own and what I am just discussing.  I do try to select my own investments from the stocks that are discussed on this blog.  As part of this transparency, about a year ago I started discussing the stocks that I actually own on weekends.  Currently with 11 stocks in my own trading portfolio, I have been reviewing one stock at a time going alphabetically down my list of holdings.  

Two weeks ago, I reviewed my holding in Cytyc.  Going alphabetically, my next stock to discuss is Kyphon (KYPH).  Let's take a closer look at this company and my experience with it! I first discussed Kyphon Stock Picks Bob's Advice on October 30, 2003, when the stock was trading at $29.15.  I "revisited" Kyphon on May 20, 2005, when the stock was trading at $28.81.

Currently, I own 150 shares of Kyphon (KYPH) with a cost basis of $29.21/share purchased on May 20, 2005.  (This is actually the second time that I have owned Kyphon, having purchased 300 shares back in 4/5/04 at a cost basis of $28.16, but selling it quickly thereafter on 4/13/04 at a price of $25.71 for a loss of $(2.45) or (8.7)%, triggering my sale after a holding period of 8 days!).

Since my most recent purchase, I sold 1/4 of my holdings (my older 'strategy' which is now replaced by 1/6th of holdings) or 50 shares at $37.98 or at a gain of $8.77 or 30% on July 8, 2005.  KYPH closed at $40.85 on January 5, 2007, giving me an unrealized gain of $11.64 or 39.8% on my remaining 150 shares. 

When shall I be selling my shares next?  On the upside, after a single sale at a 30% gain, my next targeted appreciation point would be at a 60% gain at which time I plan on selling 1/6th of my remaining shares or 25 shares at 1.60 x $29.21 = $46.74.  On the downside, after a single sale at a 30% gain, all of my remaining shares will be sold either on fundamental 'bad news' or when the stock declines to break-even or $29.21 or lower.

Let's take another look at this stock and see if it still deserves a place on the blog.

What exactly does this company do?

According to the Yahoo "Profile" on Kyphon, the company

"...engages in the design, manufacture, and marketing of medical devices to treat and restore spinal anatomy using minimally invasive technology. Its products include KyphX Bone Access Systems, which is used to create a working channel into fractured bone; KyphX Xpander, Elevate, Exact, and Express inflatable bone tamps, which are disposable sterile devices that combine the functionality of a metal bone tamp with the engineering principles of medical balloon technologies. The company also offers KyphX Xpander Inflation Syringe that allows the surgeon to deliver a measured volume of the fluid that inflates the balloon; and KyphX Bone Filler Device that deliver bone filler materials into bone cavity. Its products also comprise KyphX Bone Biopsy Device, which takes a sample of bone for evaluation purposes; KyphX Curettes, to scrape or score bone in the spine; and KyphX HV-R polymethylmethacrylate bone cement and KyphOs calcium phosphate, which are bone filler materials used in kyphoplasty procedures."

How did they do in the latest quarter?

On  November 1, 206, Kyphon reported 3rd quarter 2006 results.  For the quarter ended September 30, 2006, revenue climbed 30% to $102.7 million, from $79.0 million in the same quarter in 2005.  Net income, however, declined 19% to $9.5 million or $.21/diluted share, down from $11.8 million or $.26/diluted share in 2005.  However, the decrease was due to a stock-compensation charge....and otherwise would have come in at $14.3 million or $.31/share.  In general, I don't like any declines regardless of the explanation, however, since I already own the stock, I don't think this was substantial enough news for me to sell my shares.  I wouldn't however be writing up the stock new on this report.

What does their longer-term financial results look like?

Reviewing the Morningstar.com "5-Yr Restated" financials on KYPH, we can see the steady and rapid growth in revenue from $36.1 million in 2001 to $306.1 million in 2005 and $357.3 million in the trailing twelve months (TTM).

Earnings, which were $.65/share in 2003, dipped to $.50/share in 2004, but have since increased to $.66/share in 2005 and $.73/share in the TTM.

The company has increased their shares modestly from 38 million in 2003 when revenue was $131 million to 44 million in the TTM when revenue was $357 million.  Thus, the company has increased its shares by 16% while almost tripling its revenue.  I can tolerate this sort of mild dilution of equity.

Free cash flow has been positive and growing with $9 million reported in 2003, $21 million in 2004, $60 million in 2005 and $63 million in the trailing twelve months.

The balance sheet is still quite nice with $231.3 million in cash, enough to pay off both the $66.7 million in current liabilities and the relatively small $8.7 million in long-term liabilities.  And this without even adding in the $95.8 million in other current assets.  Calculating the current ratio, we can see that the $327.1 million in total current assets, when divided by the $66.7 million in current liabilities yields a very strong 4.9 figure.

What about some valuation numbers?

Examining the Yahoo "Key Statistics" on Kyphon, we find that this company is a mid-cap stock with a market capitalization of $1.83 billion.  The trailing p/e is rich at 60.43, the forward p/e is a bit better at 38.54.  The PEG, which I would like to see between 1 and 1.5, also comes in a bit rich at 1.61.

The Fidelity.com eresearch website shows that the Price/Sales TTM comes in at 4.76, with an industry average of 21.12.  The company has a Return on Equity (ROE) TTM of 10.93% compared to an industry average of 30.21%.  

Yahoo shows that there are 44.75 million shares outstanding with 43.81 million that float.  As of 12/12/06, there were 5.21 million shares out short representing 4.5 trading days (short ratio) or 11.70% of the float.  This is a bit significant using my own 3 day rule for the short ratio.  With the relatively rich valuation of this stock, it is relatively easy to see why some people might want to go short, betting the stock price will decline.  However, with any good news, we may see significant upward pressure as short-sellers scramble to cover their negative 'bets'.

What does the chart look like?

Reviewing the StockCharts.com "point & figure" chart on Kyphon, we can see that since 2003, although the chart has been a bit volatile, the stock has had steadily higher highs and higher lows.  The stock has been consolidating the past 1 1/2 years, but appears to be above the support levels for now.  Consolidation is probably reasonable in light of the relatively rich value of this stock.


Please excuse the complicated chart above, but I wanted to make a note at the different times I have purchased and sold, as well as written up this stock.

Summary: What do I think about this stock?

Let's summarize.  First of all the company is trading above my purchase price and I have already sold one portion of my holding.  Although I have previously owned and lost money on this fairly volatile security.  The latest quarter was reasonable after factoring out the accounting expense of stock options.  The Morningstar.com page looks outstanding with steady revenue and earnings growth, relatively stable shares outstanding, and impressive free cash flow as well as a solid balance sheet.  Valuation is a bit rich, and the stock could be vulnerable to any shortfall in earnings or revenue if that should occur.  However, at this point, I own the shares and shall stay with the stock as long as the price permits me except for any unexpected bad news. 

Thanks so much for stopping by and visiting my blog!  If you have any comments or questions, please leave them right on the blog or feel free to email me at bobsadviceforstocks@lycos.com.  If you get a chance, please feel free to visit my Stock Picks Podcast site, where I discuss some of the many stocks I write about on my blog!

Have a great weekend everyone and a healthy and prosperous 2007!

Bob  


Posted by bobsadviceforstocks at 5:10 PM CST | Post Comment | View Comments (2) | Permalink
Updated: Saturday, 6 January 2007 5:19 PM CST

Sunday, 7 January 2007 - 7:49 AM CST

Name: "George"
Home Page: http://www.fatpitchfinancials.com

Nice write up on Kyphon.  I was curious to know who are Kyphon competitors? Are they gaining on Kyphon or are they lagging? 

Thanks.

Sunday, 7 January 2007 - 8:54 PM CST

Name: "Robert Freedland"
Home Page: http://bobsadviceforstocks.tripod.com/bobsadviceforstoc

"George" wrote:

Nice write up on Kyphon. I was curious to know who are Kyphon competitors? Are they gaining on Kyphon or are they lagging?

Thanks.

George,

Best I can tell the two largest competitors to Kyphon, according to Yahoo are Biomet which has a Market Cap of $10.19 billion compared to Kyphon's $1.83 billion cap, and Stryker which is even larger at a market cap of $22.73 billion.  So I wouldn't exactly say they were gaining on Kyphon....the reverse appears to be more the case.

Kyphon showed revenue growth of 29.90% (again according to Yahoo) year over year, vs. the 4.8% yoy growth for BMET and the 10.4% growth for Stryker.

I hope that answers your question.  I am glad you enjoyed my write-up and hope that you visit again and comment on other posts as well.  Regards!

Bob

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