If there's any such thing as a company that investors can root for unreservedly, Natus Medical
Forget the cute ticker. Lots of companies have clever tickers -- Southwest Airlines
Still, investors need to be practical and not let their hearts rule their wallets. You can admire clean-fuel dreamers like Ballard Power
On the surface, Natus' results look pretty disappointing. Revenues rose 19% over the second-quarter 2003. Yet diluted earnings per share worsened, from a loss of $0.07 last year to a loss of $0.22 this year.
Still, this is just the surface view. Peel back $2.2 million in charges that the company took for discontinuing operations, restructuring, and paying severance to a departing CEO, and that per-share loss would have been only $0.08. If you want to look at the numbers in a different light, then after subtracting out the one-time costs, consider adding back in the $700,000 that Natus expects to save on salaries, post-restructuring. Had it been able to do that this quarter, the loss would still have been $0.04.
So when Natus predicts it will earn aprofit of $0.03 to $0.04 next quarter, what's a Fool to think? I suspect you have to assume two things. First, that Natus will hit the top of its $9 million revenue target next quarter. Second, that it will overcome the cost overruns and other problems encountered this quarter, to not only regain the gross margins it was earning a year ago, but improve upon them.
Assume all of that, and then assume Natus' operating expenses will approximate what they were a year ago -- $5.6 million -- minus the $700,000 in salary savings. If Natus can again achieve last year's 60% gross margin (a feat that has eluded it over the past four quarters), and if operating costs are no more than $4.9 million, then on $9 million in revenue, the company could conceivably earn a $500,000 profit. That would equal per-share diluted earnings of $0.03 per share. To reach its upper earnings target of $0.04 per share, therefore, Natus will need to increase gross margins even more, slash operating costs, or beat its own revenue assumptions -- or some combination of the three.
Fool contributor Rich Smith owns no shares in any company mentioned in this article.