BABY's Growing Pains

Whether it's large Schering-Plough (NYSE: SGP) acquiring Organon BioSciences, Mylan (NYSE: MYL) swallowing a company larger than itself, or serial acquirer Inverness Medical Innovations (AMEX: IMA) doing its thing, growing pains are an inevitable consequence of extrinsic growth.

Such appears to be the case for little Natus Medical (Nasdaq: BABY), which has run into a hiccup after making five acquisitions over the last three years.

Fourth-quarter results from the maker of newborn care and hearing tests weren't all that bad; revenue was up 19% year over year and adjusted earnings per share grew by 31% over the year-ago quarter. But that's a considerable slowdown from the first half of last year, let alone the 72% growth in adjusted earnings per share it managed in 2006.

The growing pains manifested themselves in multiple ways in the most recent quarter. Natus couldn't ship any of its Cool-Cap units in the U.S. during the quarter, because it was waiting on an FDA clearance, which it finally got earlier this month. It also had to shut down a plant for an entire month while it dealt with issues brought up in an FDA warning letter. Lastly, after the acquisition of Xltek in November, the company decided to realign its sales force, which caused what its CEO called a "distraction." Yeah, I'd be a little distracted too if I was worried about losing my job.

The good news is that two of the three issues are taken care of (it's still waiting to hear if its response to the warning letter was sufficient), and the company can get back to growing.

This Motley Fool Hidden Gems pick is looking for adjusted earnings-per-share growth of at least 45% next year, on the back of 36% growth in revenue. Not only is Natus going to get a little bit taller,  it's also going shed some of the fat from the acquisitions. It'll take quite a while before Natus Medical is the size of Medtronic (NYSE: MDT) or Boston Scientific (NYSE: BSX), but this baby sure does have growth potential.