Why Natus Medical, Inc. Shares Popped

Natus Medical shares pop after reporting its fourth-quarter earnings results, but could this one figure leave shareholders crying for more?

Jan 29, 2014 at 2:03PM

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Natus Medical (NASDAQ:BABY), a provider of neurodiagnostic and newborn health-care products, popped by as much as 12% after reporting its fourth-quarter results before the opening bell.

So what: According to Natus Medical's press release, the company reported a fractional decline in revenue to $90.6 million from $90.8 million in the year-ago period as net income rose 82%, and adjusted EPS expanded to $0.37. By comparison, Wall Street had been looking for Natus Medical to report an EPS profit of just $0.31 on $90.1 million in revenue. Natus reaffirmed its first-quarter guidance issued just over two weeks ago of $0.21 to $0.24 in adjusted EPS, and $82 million to $86 million in revenue, but slightly bumped up its full-year adjusted EPS forecast to a new range of $1.14 to $1.18 from prior guidance of $1.12 to $1.16. Specific to that bump, and its better-than-expected fourth-quarter results, was stronger international revenue, which has the company targeting a long-term annual non-GAAP profit margin goal of 20%.

Now what: It was another quarter of rather "blah" top-line growth, but Natus Medical did what it does best, and that's pummel Wall Street's EPS estimates. The company has now delivered five straight double-digit EPS percentage beats going back to the fourth-quarter of fiscal 2012. While I appreciate the niche that Natus Medical operates in, and feel that it can utilize that niche to its pricing advantage, I'm concerned that there are few avenues to consistent organic growth at the moment. Revenue in 2014 is expected to be flat to up very low single-digits, which makes Natus' projected P/E of 22 at the EPS midpoint a bit tough to swallow. Until we see newer products hitting the market, or a serious decline in Natus' share price, I'd suggest passing at these levels.

Natus Medical shares may be soaring today, but they may be hard-pressed to keep up with this top stock in 2014
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Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool recommends Natus Medical. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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