Three months ago, in reviewing a press release confirming the forward guidance issued by PossisMedical (NASDAQ:POSS), I concluded that the company looks overpriced. Today, in the wake of last night's earnings report for fiscal Q1 2006, my view remains unchanged.
Three months ago, the situation was this. Possis was guiding investors to expect it to produce $69 million to $74 million in revenues over the course of fiscal 2006, and pro forma profits of $0.40 to $0.50 -- with no guidance given on what the firm's actual GAAP net income, or free cash flow, might turn out to be. In the best-case scenario, those numbers might have given the company as much as 14% revenue growth against a P/E ratio of 28, suggesting that the equity was overpriced.
Yesterday, the company reported that the scenario it faces is far from the best case. The company contracted its forward guidance range to $66 million to $70 million, its pro forma profits to between $0.34 and $0.42, and its GAAP net profits estimate to $0.16 to $0.24. Thanks to the net profits estimate, it's now finally possible to run an accurate "PEG" on the company.
Take the latest best-case scenario, to give this company the benefit of all possible doubts. If Possis can book $70 million in revenues, that would be just an 8% increase over last year's $65.1 million. If Possis can record $0.24 per share in profits, its forward P/E is a startling 47. Divide that 47 by the 8% growth rate (treating it as a whole number), and the company currently trades at a PEG of 5.9 -- nearly six times what most value investors would consider a "fair price."
Speaking of fairness, let me give the counter-argument to that analysis as well. The consensus of the handful of analysts following Possis is that over the next five years, Possis will rush right past next year's anemic growth rate and post an average of 25% annual profits growth. But even if that proves true, the company's PEG would be 47/25 = 1.9, or nearly twice its fair price.
My conclusion: Tom Gardner was right in recommending that Stock Advisor subscribers "sell" Possis back in June. True, the company is far from dead. It's still profitable. It still generates real cash profits. In fact, over the four quarters preceding this one (for which no cash statement has been released), Possis generated $10.2 million in free cash flow versus just $6.2 million in GAAP net earnings. But with growth slowing and its future still clouded by the results of last year's AiMI study, the risks of investing in Possis just plain outweigh the potential benefits.
For more Foolish news on Possis, read:
- Possis' Possible Pitfalls
- Possis Medical in Critical Condition
- The Positive Side of Possis
- Trial Letdown Hits Possis Medical
Fool contributor Rich Smith has no position, short or long, in Possis Medical.
