To really understand a stock, you have to get down and dirty, break out your pencil, and weigh the "risk vs. reward" potential of the company you're following. With that in mind, let's roll up our sleeves, sharpen our pencils, and take a closer look at the good and the bad at ICU Medical (Nasdaq: ICUI), and see if its stock is a good value … or a potential money pit.

The good
ICU Medical might be a relatively small player in the medical supplies sector, but it has a clean balance sheet and international growth on its side. Prudent financial management has given ICU a balance sheet with $82 million in cash and short-term investments, with no debt. Having cash on hand allowed ICU to make promising acquisitions in the past, as it did when it purchased Hospira's (NYSE: HSP) critical care product line in 2009.


This critical care segment the spearhead of ICU's push into international markets, which play an increasingly important role at the company. ICU's international distribution channel has grown from 15% of total revenue in 2008 to 23% of total revenue through the first nine months of fiscal 2010. Domestically, ICU faces stiff competition, but internationally, sales picked up in all of its segments except for custom oncology.

The bad
ICU's best selling product is the Clave, a needleless IV connection device which accounts for over a third of the company's revenue. ICU admits that increased competition with the Clave business will force it into expanding its custom product lines in order to continue to grow. This isn't to say its custom infusion sets and critical care supplies aren't performing well, only that growth in its largest revenue segment is slowing.

Also worth watching are ICU's gross margins, which are trending lower because of critical care integration costs and rising transportation costs. Through the first nine months in 2010, ICU's gross margins were 45%, compared to 48% in the same period during 2009. Keep in mind that ICU tends to see an uptick in orders during the winter months, as people are more likely to get sick during then, so its margins could still move higher before years-end. This drop might also signal an impending red flag, and with competitors Becton Dickinson (NYSE: BDI) and Baxter International (NYSE: BAX) sporting gross margins above 50%, ICU has some catching up to do.

The takeaway
ICU Medical has a strong cash position and is solidly profitable, so its immediate outlook isn't concerning. What it will come down to is whether ICU can keep competitors from significantly eating into Clave's market share, or if that share does fall, whether it can make up for it with increased international sales. Although this could easily go either way, I feel we've probably just seen the tip of the iceberg for ICU's international sales, and suspect that the stock could become a long-term winner.

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