Is BABY Back?

Motley Fool Hidden Gems pick Natus Medical (Nasdaq: BABY  ) reported earnings Monday, and its stock ended up 7.5% -- but was the news as good as all that?

True, earnings "beat estimates," and revenues increased sequentially and year over year. But the way I read the news, essentially all of the year-over-year $3.2 million increase came from newly acquired revenue streams. According to CFO Steve Murphy, the purchase of Alpine Biomed "contributed $2.4 million," while CEO Jim Hawkins stated that Hawaii Medical has "trailing annual revenues of $3.2 million" -- suggesting about $800,000 per quarter.

In fact, revenues may have declined ex-acquisitions. In the post-earnings conference call, Murphy confided that: "Excluding the contribution of Hawaii and Alpine, our revenue grew by 10% sequentially over our 2009 second quarter" -- when Natus booked $37.3 million in revenue. In other words, revenue ex-acquisitions would have been about $41 million -- essentially flat from last year.

Looking farther out, Hawkins said the third quarter saw "an increase in orders. We believe this is a sign that hospital capital spending has stabilized and is gradually improving." But before you get too excited, "We believe hospitals are continuing to limit spending on capital equipment." That's not great news for vendors of big-ticket capital equipment like General Electric (NYSE: GE  ) or Intuitive Surgical (Nasdaq: ISRG  ) . It could bode better, though, for makers of cheaper medical items like ICU Medical (Nasdaq: ICUI  ) or Atrion (Nasdaq: ATRI  ) , for example.

Big BABY
Problem is, the good news is already more than factored into Natus's stock price. Hawkins said Natus's $0.13 in third-quarter profits "exceeded our expectations". While others struggle, he predicts Natus will earn as much as $0.40 this year, and perhaps $0.50 next year -- 25% growth.

Which sounds pretty good. But consider too that at $0.50 per share, Natus now sells for a rich 30 times multiple to next year's earnings. That might not sound unreasonable if the firm could maintain 25% growth, but in fact, analysts who track the company think Natus will perform at just 18% over the next few years.

Foolish takeaway
The valuation picture only looks worse when you notice that: "guidance does not include the impact of any future acquisition-related charges associated with the Hawaii Medical or Alpine Biomed acquisitions." Translation: Forget about the $0.50 when it comes to the real bottom line.

And maybe, forget about buying BABY.