Analysts ended up with a bit of egg on their face last week when Genoptix Inc. (GXDX) reported earnings. In August we took a look at the company, noting that new customers were leading to significant revenue growth. The trend has continued with Q3 revenue coming in at $33.5 million – good for a 47% increase over last year. Analysts had been expecting earnings of $0.34 which were blown away by the actual $0.53 per share figure.
Management didn’t stop with an excellent historical record. The company issued guidance for the fourth quarter with full year revenue expected at $180 million and EPS of $1.60. This guidance caused analysts to jump to adjust their models and several research desks had to increase their estimates for 2009 earnings. In addition, the company expects to see 2010 revenue grow to $235 million – good for a 30% annual increase.
Growth was particularly impressive during the third quarter because summer is typically a slow season for customer acquisitions. As Genoptix continues to add to its sales force, the potential for additional growth is significant. At the end of the summer, the company served a roughly 1,300 physicians with nearly 15,000 patient cases in process. Certainly, the track record of growth should instill investor confidence over the coming quarters.
It was another quarter of solid performance as we continued to fine-tune our operations and drive new business while maintaining our signature high-quality service offering ~Sam Riccitelli, EVP and Chief Operating Officer
Looking at the financial strength of the company, there are two metrics which stand out to me as significantly positive data points. First, the company was able to cut it’s Days Sales Outstanding (DSO) to 51 compared to 56 days last year. This means that the company has been more successful at collecting revenues from physicians on a timely manner. Similarly, earnings benefited $0.03 this quarter from a decline in bad debt expenses. So skill in collecting revenue and improvement in customer credit score can be considered part of the company’s financial strength.
Secondly, GXDX has amassed a significant cash balance of $141.9 million. With no debt on the books, this hefty cash balance allows management to be flexible in how they approach growth opportunities. There has been talk of opening a second laboratory which would be used to serve the company’s east coast physicians and offer a bit quicker turnaround. The cash balance would offer flexibility for this endeavor and would also come in handy if the company were to acquire another operation in order to expand their footprint.
The one thing that concerns me with Genoptix is the way the stock traded on Friday after the news was released. Initially, the stock gapped higher making a new recovery high. However, as the day went on, investors began taking profits and eventually sold the stock down to where it only recorded a modest gain for the day. Volume was extremely high which would have been a positive had the stock maintained its gains. However, the late-day weakness could leave some who bought on the news feeling “trapped” and lead to additional selling.
I believe that Genoptix is an excellent long-term position worth holding for several quarters if not years. The management team has built a strong track record of growth, and the future looks bright for additional growth. The Medicare reimbursement schedule is expected to remain relatively stable in 2010 which will likely be a positive for the stock. But with the action on Friday, I think traders might be able to pick up shares at a bit more of an attractive spot (possibly between $32 and $33. Regardless of where you pick up exposure, I believe GXDX is an excellent long-term growth opportunity.
FD: Author has a long position in the ZachStocks Growth Model
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