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Looking through the list of top % gainers on the NASDAQ today, I came across an old name, a stock that I have reviewed previously. Somanetics (SMTS) is having a nice day, trading as I write, at $22.25, up $1.51 or 7.28% on the day. I do not own any shares or options on this company.
I first posted Somanetics (SMTS) on Stock Picks on March 14, 2004, when it was trading at $11.50 (!). Thus, the stock has appreciated $10.75 or 93.5% since posting a little more than a year ago.
According to the Yahoo "Profile" on Somanetics, the company "...engages in the development, manufacture, and marketing of medical devices primarily in the United States. Its INVOS Cerebral Oximeter, a noninvasive patient monitoring system, provides continuous information about changes in the blood oxygen level in the brain."
On June 14, 2005, Somanetics reported 2nd quarter 2005 results. For the three months ended May 31, 2005, revenue climbed 68% to $5.1 million from $3 million. Earnings came in at $890,183 or $.08/share, up 100% from $409,730 or $.04/share the prior year. They beat analysts expectations on both earnings and revenue; they were expected to come in at $.05/share on revenue of $4.4 million.
Looking at the "5-Yr Restated" financials from Morningstar.com, we can see the steady revenue growth from $5.1 million in 2000 to $12.6 million in the trailing twelve months (TTM).
Earnings during this period have improved consistently from a loss of ($.57)/share to $.79/share in the TTM.
Free cash flow which was negative at ($1) MILLION IN 2002 has also improved to a positive $2 million in the TTM.
The balance sheet, as presented by Morningstar.com, looks solid with $7.5 million in cash, alone able to cover the short-term liabilities of $1 million, and no long-term debt at all. In addition, SMTS has another $3.7 million in other current assets.
Looking at "Key Statistics" on SMTS from Yahoo, we can see that this is virtually a micro-cap stock with a market capitalization of $222.84 million. The trailing p/e is 27.97. I do not trust the forward p/e number from Yahoo, but they are anticipating a 53.42 p/e (which would go along with a halving of earnings instead of the doubling just reported.) for fye 30-Nov-06. I suspect, unless there is something else I don't know about this company, that this forward p/e has just not caught up with analysts or vice versa because of the very small nature of this company. The same goes with the PEG which is at 2.07.
Yahoo shows a Price/Sales of 15.10, which certainly looks rich to me. Referring to Fidelity Brokerage, SMTS is in the "Medical Appliances/Equipment" industry group. Within this group, this Price/Sales ratio puts it at the top in terms of this ratio. Other stocks in this group, trailing SMTS in the Price/Sales ratio, include Zimmer (ZMH) at 6.5, Medtronics (MDT) at 6.4, St. Jude (STJ) at 6.2, Biomet (BMET) at 5.1, and Edwards Lifesciences (EW) at 2.7.
Going back to the Yahoo information, we can see that there are 10.18 million shares outstanding with 9.63 million that float. Currently there are 314,260 shares out short representing 3.2% of the float or 6 trading days. This is significant (imho), with my own cut-off of 3 trading days that I use to look at stocks. Thus, this adds to the buying pressure.
No cash dividends reported on Yahoo and the last stock split was a "reverse" 1:10 stock split carried out in April, 1997. For those of you who may not understand reverse splits, this is usually done to actually boost a poorly performing stock to increase the stock price. For instance, if you were the owner of 100 shares prior to a 1:10 split, after the split, you would only own 10 shares of the new issue. The stock price goes up proportional to the split. If a stock was trading at $1 before a 1:10 split, it should be trading at $10 after the split.
What about the chart? If we look at a "Point & Figure" chart from Stockcharts.com, we can see that this stock was trading lower throughout most of 2002, dropping from $4.75 in April, 2002, to a low of $%1.25 in August, 2002. Since that time, the stock has essentiall traded steadily higher to its current levels around $22.
So what do I think about this stock? Well, first of all, I wish I had bought some shares last year when I first posted it :(. However, let's review some of the things I have written: the stock is making a nice move today on the back of a fabulous earnings report that beat analysts expectations with a 68% rise in revenue with a 100% jump in earnings. In addition, the company has steadily been growing both revenue and earnings the past five years. They are spinning off free cash flow and the balance sheet looks terrific.
A couple of negatives. The valuation is steep with a Price/Sales ratio off the chart. However, the rest of the valuation isn't bad with a p/e in the low 20's and the latest quarter showing 100% growth in earnings. I am not sure about the other valuation numbers on Yahoo with a forward p/e so much higher than the current p/e. That needs investigation.
The short interest adds buying pressure and the chart looks great. I still find this stock very attractive. Of course, any small slip-up will hand you a loss on a small cap stock like this. However, the potential seems quite large, and the stock might just be an acquisition target for a larger company looking at expanding its medical equipment line. I certainly do NOT know of anything going on at this time.
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