Foolish Forecast: Kensey Turn It Around?

• Email
• Share
• Print

All fiscal year long, Kensey Nash (Nasdaq: KNSY) hasn't met an analyst consensus earnings target it couldn't flub. But might this maker of bio-absorbable arterial sealants have turned things around in the final quarter of its fiscal year? We'll find out when Kensey Nash reports its fiscal Q4 and full-year 2007 earnings Monday morning.

What analysts say:

• Buy, sell, or waffle? Five analysts follow Kensey Nash. Two rate it a buy, and three a hold.
• Revenue. On average, they're looking for just 2% sales growth, to $18.7 million.
• Earnings. Profits are predicted to plunge 81% to $0.05 per share.

What management says:
It's been a good while since we last checked in on Kensey Nash. Why the lack of interest? Well, for one thing, the stock is only a former selection of our Motley Fool Stock Advisor service. For another, it just barely beat the S&P during its two years in our portfolio, and underperformed our average 35% margin of outperformance. (Find out who the outperformers with a free, 30-day trial to Stock Advisor.)

But it's high time we checked back in on this, our once-upon-a-time favorite stock. Reviewing the firm's Q3 report from April, we find CEO Joe Kaufmann expressing pleasure with the performance of the firm's biomaterials business in general, and its partnership with Biomet (Nasdaq: BMET) in particular. In contrast, Kaufmann was less than thrilled with the delay in his promised "sequential growth momentum that we had hoped to achieve this quarter." What Kaufmann dubbed "challenges in manufacturing" the firm's ThromCat Thrombectomy Catheter System resulted in limited availability of products for sale, and worse, a product recall of 29 systems already sold.

What management does:
These problems have kept both rolling gross and operating margins waning for two consecutive quarters. Operating margins currently sit far below those of rivals Smith & Nephew (NYSE: SNN) and Stryker (NYSE: SYK), albeit much higher than smaller rival Vascular Solutions (Nasdaq: VASC) can boast.

Why are Kensey's gross and operating margins down, but its net up? Because neither gross nor operating margins account for the restructuring costs which have weighed on the net. Such costs were absent in each of the last two quarters, removing pressure from the bottom line.

Margins	12/05	3/06	6/06	9/06	12/06	3/07
Gross	70.6%	70.4%	70.3%	73.2%	70.5%	69.7%
Operating	21.0%	19.3%	19.0%	25.4%	20.5%	20.4%
Net	10.0%	7.5%	6.2%	8.3%	11.0%	11.4%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
Back in April, Kaufmann predicted a slowdown in its biomaterials division because of unspecified "ordering patterns from certain major customers, primarily St. Jude Medical (NYSE: STJ)." At the same time, he promised that "improved field sales productivity and the launch of the TriActiv ProGuard device with a carotid indication in Europe" would help spark growth in the firm's endovascular products division.

No more. In July, Kensey issued a press release (mysteriously absent from its SEC filings, given its materiality) advising that it is giving up on its TriActiv system entirely, and closing down this line of business. Doing so, says Kensey, will save the firm about $3.6 million in costs annually, but result in a charge to earnings of about $5.1 million, spread over the last quarter of 2007 and fiscal 2008. Expect the Q4 2007 portion of this charge to eat up as much as $0.24 per share on Monday.

Fool contributor Rich Smith does not own shares of any company named above. The Motley Fool has a disclosure policy.