BABY's Growing and Eating Right

Looks like the BABY has gotten over some of its growing pains.

Natus Medical's (Nasdaq: BABY  ) newest acquisitions are contributing nicely to both the top and bottom lines. Revenue was up 36% year over year, and net income increased 73% over the year-ago quarter. The bottom line grew faster partly because the company has kept research and development spending flat, but also because the new companies have created considerable synergies. For instance, general and administrative expenses grew half as fast as revenue did.

There's more growth to come as the company rolls out its ALGO 5 newborn hearing screener. Natus hopes that a lot of current customers will upgrade to the new model from the seven year-old technology in its ALGO 3. No word on what happened to the missing ALGO 4, though. Maybe the company's only doing odd numbers.

There are also more cost cuts to come. After acquiring XLTEK, the company split its sales force to sell to its newborn and neurology products separately. Natus expects that the move should start benefiting the company in the fourth quarter, resulting in $2.4 million in annual savings going forward.

Last month, the company announced that it was acquiring small, privately held Sonamed. Its revenue won't add much to the top line -- just $3.5 million last year -- but Natus will acquire the 10% or so market share that Sonamed had in newborn hearing screens. Natus will pay about 1.8 times Sonamed's revenue. Seems like a good deal, especially because it's about half the multiple that Natus sports, and Sonomed had better gross margin to boot.

The company raised $15.4 million in a secondary offering last month. I'd expect it to use that cash to continue its acquisition spree -- a baby's got to grow, you know.

The thing I like about the Motley Fool Hidden Gems pick is that, while its goal may be to become the next Johnson & Johnson (NYSE: JNJ  ) or Boston Scientific (NYSE: BSX  ) , it's not making acquisitions just for the sake of it. Instead, Natus is only looking for companies that will be "immediately accretive in the first full quarter after acquisition." The baby may have to grow, but it's also got to eat right.