Thursday, December 18, 1997

Osteotech Inc.
(Nasdaq: OSTE)
Phone: 732-542-2800
Price (12/17/97): $28 9/32


HOW DID IT DOUBLE?

Orthopedic products company Osteotech has been hitting on all cylinders. After languishing for 18 months, late last spring the stock began to move up sharply. After missing earnings estimates badly due to extraordinary charges to earnings in the December quarter of 1996, the company has bested estimates by a wide margin in the three subsequent quarters. Over those three quarters earnings growth has been 400%, 700%, and 467%, respectively. Margins have expanded as well.

Top this excellent financial performance off with a feature article in Investor's Business Daily in early June, an article in Individual Investor in October, a recommendation by the Cabot Market Letter in November, and a recommendation from Louis Navallier in December, and you have all of the trappings of a Double.

BUSINESS DESCRIPTION

Osteotech is an orthopedics medical products company. The company manufactures and sells products that aid bone healing. Its most exciting product is Grafton, a product that is made from human bone and is used for bone grafting. The company gets its bone from the Red Cross and other transplant organ procurement agencies. It has an exclusive contract with the Red Cross through 2006.

In addition to this bone graft material, the company makes titanium coatings for various orthopedic and dental implants. It also distributes spinal surgery implants manufactured by German companies Heinrich Ulrich, KG, and aap GmbH.

FINANCIAL FACTS

Income Statement
12-month sales: $41.8 million
12-month income: $2.9 million*
12-month EPS: $0.31*
Profit Margin: 6.9%*
Market Cap: $265.8 million
(*Includes one-time charge)

Balance Sheet
Cash: $13.8 million
Current Assets: $25.2 million
Current Liabilities: $8.5 million
Long Term Debt: $0.4 million

Ratios
Price-to-earnings: 91.2
Price-to-sales: 6.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

Osteotech has been undervalued on an earnings growth basis for the past couple of years. I had picked the stock for the Healthfolio almost two years ago and the stock price didn't move. After the March quarter when the company bested earnings estimates, an investor could have spotted the promise of the stock. The Grafton product is unique and fills an important niche in orthopedic care. In 1996 the company released two new forms of the material, a flexible form and a putty form, both of which greatly increased the utility of the product.

With the release of the second straight estimate beating earnings report in July, the stock price took off on above average volume. The company has a float of only 4.5 million shares. When a small stock like this gets noticed, the price can rise very quickly.

A small company with a unique product, a small float, and estimate-beating earnings should have enticed an interested investor.

WHERE TO FROM HERE?

Osteotech is clearly not the bargain it was six months ago. At the beginning of the year the price/sales ratio was under 2, today it is over 6. The company is selling for 33 times 1998 earnings estimates of $0.85 per share. Only two analysts follow the company at present.

On a price/sales or earnings growth basis it is difficult to see the stock as a good value at current prices. However, with increasing interest from the investment community, a small float, and the potential for increases in earnings estimates, the stock could have further room to move. That said, the next double will be longer in coming.

-Mark Weaver, MD
(MWEAV@aol.com)


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