Health Care has been a controversial topic for US investors. Reforms to Medicare and regulations on private insurers will likely have an industry altering effect. There have certainly been some land mines to dodge when investing in this sector, but profitable positions have also been available. Take for instance Amedisys Inc. (AMED) which is up about 33% since the stock was recommended in here in April. Amedisys is positioned to actually save Medicare costs and investors are bidding the stock higher in anticipation of the strength.
Today we’re going to look at a specialty diagnostic company which also has the potential to shine brightly even in a reformed health care environment. Genoptix Inc. (GXDX) is essentially a diagnostic laboratory for oncologists and hematologists, and the company specializes in testing intricate blood and bone marrow samples for cancer. Genoptix has developed a incredible reputation over years of operation in that it has not lost a single bone marrow sample. The track record gives physicians confidence to refer GXDX business because bone marrow samples are extremely painful to draw and it is unimaginable for a doctor to have to take a second sample because the lab misplaced the original.
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Confident physicians leads to business growth. Over the past eight quarters Genoptix has seen its revenue grow anywhere from 63% to 137% on an annualized basis. The company currently routs all of its diagnostics through the central lab in Carlsbad California, but is working on opening an east coast laboratory in the near future. The expansion will allow the company to offer a faster turnaround for physicians on this side of the country and should increase capacity for further growth.
More capacity is certainly a good thing as the sales team continues to land new physicians as customers. At the end of June, Genoptix boasted 1,250 community physicians referring business across the country.
Our unique physician-directed approach to testing and diagnosis is driving increased demand for our services as we continue to expand our customer base. ~Tina S. Nova, Ph.D., President and CEO
During the second quarter, Genoptix reported revenue growth of 62.8% over the second quarter 2008, and total earnings per share were reported at 44 cents per share. The earnings represented a 37.5% increase over year ago levels, even considering the tax rate was 43.1% (it was 5.1% during the June quarter of 2008). In the second half of the year, Genoptix will hire a few more sales reps which should lead to continued growth in revenue.
According to the earnings press release, Genoptix should see revenue of $175 to $180 million this year which is above the prior guidance level. Earnings are expected at $1.40 to $1.45 which is a far cry from the $1.20 to $1.25 that management had disclosed previously. Since the report, analysts have increased their 2009 estimates to $1.46, but it wouldn’t be surprising at all to see the company beat these numbers given it’s history of promising “good” things and then delivering “great” performance.
When looking at competition, Genoptix has set itself apart from the pack and has little risk from more generic labs such as Quest Diagnostics Inc. (DGX) or Laboratory Corp of America (LH). In fact, the only major competitor for most physicians is the hospital lab on site. Most hospital labs don’t have the expertise that GXDX posesses, but once again the fear of losing a sample can be a strong motivator. As Genoptix continues its streak of not losing any samples, you can bet that the sales team will be able to wear down skeptical physicians and land new contracts.
Buying Genoptix is not a cheap investment. The sotck currently trades just under $30 with earnings expected at $1.46 this year (again, I believe that is conservative) and analyst models of $1.73 next year. At current prices, the stock is trading at about 17 times next year’s earnings. But with no debt, cash and short-term investments of $122 million, and an the potential to make stock purchases or accretive acquisitions, the opportunity appears to have strong value.
After the quarterly announcement, the stock gapped up 15% on the firsst day. Since that time, the stock has settled down and given up half of that gain, but still sits above the 50 day average in a general area of support. The pullback on light volume offers an attractive technical spot to buy stock and I expect that investors with a 9 to 12 month time horizon should be able to book 15 to 30% profits without any major surprises. If the company makes an acquisition or announces a major stock repurchase program, those returns could quickly increase.
FD: Author does not have a position in GXDX
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August 15th, 2009 at 5:07 pm
very weird action after the great results – 2 weeks straight down