The last thing you ever want to own is the day's worst performer. Drum roll, please. Introducing -- with one-third less market capitalization than it had yesterday -- medical device maker Synovis Life Technologies (NASDAQ:SYNO).
Yes, with sales down 10% and net income 60% lower, this morning's results were disappointing. Worse, the company hacked guidance for the fiscal year ending Oct. 31, trimming expected revenue by $15 million and EPS from $0.56 to $0.60 a share to $0.28 to $0.34 a share. The stock closed down 37%.
What a difference a year makes. Last August, Synovis was riding high on a favorable reimbursement decision for lung volume reduction surgery (LVRS) using its Peri-Strip product. In 1995, the last year LVRS was reimbursed, Peri-Strip sales were $5.6 million. Now the company is forecasting only "modest" LVRS-related sales for the second half of the fiscal year.
So, why should Synovis interest investors? For one, it's a micro-cap (all the more so today) among giants such as St. Jude Medical (NYSE:STJ), Guidant (NYSE:GDT), and Medtronic (NYSE:MDT). And until recently, the company had been growing revenue at twice the rate as these monsters.
Moreover, medical devices have long been a solid growth business, and the stocks of the major players are all generously priced at more than 30 times earnings. If Synovis can get back on its feet, the stock's potential would be considerable.
And there is hope. The company's interventional business, its largest division -- though one with declining sales -- received Food and Drug Administration approval in March for a steerable stylet, a disposable device used by physicians while implanting pacemaker leads in the heart. The company reports a "high level of interest in this technology."
Meanwhile, the surgical business, which is rapidly approaching the size of the interventional business, has received FDA marketing clearance for Peri-Strip in intestine, mysentry, colon, and colorectal applications. Expanded use for the strips bodes well for future quarters, and while growth will be modest in 2004, 2005 and beyond is where investors should be focused.
The obvious risk here is the declining sales. But you also have $41 million in cash and marketable securities and virtually no debt. Couple that strong balance sheet with an expanding market and interesting long-term growth opportunities, and you have at least a few attributes of a Motley Fool Hidden Gems candidate.
OK, let's not get ahead of ourselves. But I will say this: Synovis may be the biggest percentage loser on a so-so day, but the future looks a whole lot better.
Does Synovis really have what it takes to be a hidden gem? Take a free trial of Motley Fool Hidden Gems and find out.
Fool contributor W.D. Crotty owns shares of Medtronic.
