From Precious to Precocious

Baby hearing and neurology expert Natus Medical (Nasdaq: BABY  ) set out a pretty lofty goal for itself back in 2004: Go from revenue of just $31 million to a run rate of $250 million by the end of 2008.

Given that fourth-quarter revenue is expected to be about $50 million, Natus Medical will need to use some of its $69 million in the bank to make an acquisition or two this quarter -- and it sounds like some may be in the works -- to get to its goal. But even if it doesn't make it and it ends the year with a $200 million run rate, that's still pretty impressive. After all, increasing revenue nearly sevenfold in three to four years is quite a feat.

For the third quarter, revenue was up 45% year over year. Most of that was from acquisitions the company has made, but management did comment on the nice 10% internal growth rate. Of course, all that acquired revenue came at a cost: Earnings per share were up just 21% as the company grabbed cash earlier in the year through secondary offerings. While the financing dilutes shareholders' interest, it seems to be a better strategy than taking on a lot of debt to make acquisitions, like Mylan (NYSE: MYL  ) and Boston Scientific (NYSE: BSX  ) have done.

The company has pretty much finished the restructuring it started in February. Management believes it will save it $2.4 million per year going forward. That's some serious savings for a company that only had $4.8 million in income in the third quarter.

We'll get a better idea of what Natus' new long-term goals are at the end of the year, but it seems to me the company has two choices: get acquired by a health-care company like Baxter (NYSE: BAX  ) or Abbott Labs (NYSE: ABT  ) or begin to grow into fields outside its core and try to become the next Johnson & Johnson (NYSE: JNJ  ) in a hundred years or so. Given its recent acquisitions, there might not be too many companies left for Natus to acquire in its core field.

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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Johnson & Johnson is a selection of the Income Investor newsletter. The Fool has a disclosure policy.


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