Med-tech is usually a reliable source of controversial stock ideas. Valuations can appear gonzo, giant competitors lurk in the shadows, and there are plenty of wannabe pretenders who'd really like inexperienced investors to believe that they're contenders. But that's where I spent much of my time in the Wall Street world, and it's still home to me.
All that aside, Kyphon
It's also nice to be able to have a substantive discussion of margins at Kyphon, since they are actually profitable. Not only did the company post a gross margin of 88.7% (higher than a year ago), but operating margin improved from 15.1% to 16.5%. As a result of higher sales and better margins, earnings growth exceeded that of sales and came in at 64%.
Guidance from Kyphon management was also quite encouraging. Although the company will now be growing its sales force faster than previously planned, it doesn't look as though performance will be suffering. Not only did management boost revenue guidance for the year, but the earnings projections suggest that operating margins could be in the 20s before year-end. If that comes to pass, it means there could be some pretty hefty operating leverage in the back half of this year, as well as in years to come.
Prior to a very successful outcome in litigation against would-be rival Disc-o-Tech (yeah, that really is the company's name), this stock hadn't gone anywhere fast in the last year. Now, though, the stock stands near a 52-week high. I know valuation on this stock is somewhat stretched, even by the liberal standards of small-cap med-tech, but if the company delivers on its earnings growth potential, the stock should continue to rise and deliver a sharp pain to the rather large number of shorts.
More info on ortho:
- Stryker Delivers the Growth
- Biomet Wants Your Body
- The DOJ Goes Fishing for Orthopedics
- Kyphon Developing a Backbone
High growth? Check. Great market potential? Check. Those are just two of the traits we look for at Motley Fool Rule Breakers. Learn more witha free trialsubscription today.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
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