"I shot the arrow in the air, It fell to earth, I knew not where." -- Henry Wadsworth Longfellow
Aside from the appalling lack of archery safety that that quote implies, it's not a bad analogy to the market. Said a bit more colloquially, "You pays your money and you takes your chances." Unfortunately, owning shares of medical products maker Arrow International
Earlier this week, management took down expectations for the fourth quarter, putting out guidance that suggests basically no revenue growth for the company's fourth quarter. But it's not as though revenue growth has been especially robust lately -- nine-month sales to date were only up about 6% over the prior year.
So, is this just another case of a failed company / management / technology? I don't think so. See, the problem that Arrow International has been having is one of capacity constraints. In other words, the company has plenty of business, but it can't fulfill the orders it has. In the case of the fourth quarter, it looks like back orders once again crimped performance as the company couldn't overcome technical problems making its Arrow Epidural kits and a shortage of components for the StimuCath product line.
Fortunately, Arrow isn't just sitting idly. Rather, the company launched a facility expansion program that should help alleviate the problem. Of course, this will cost money (about $45 million thru summer 2006), but Arrow has plenty of resources to pay for it.
Although the stock doesn't appear cheap, I wonder if that's because these capacity constraints haven't pushed down performance. In other words, current results may be understating the underlying potential of the business. After all, while catheters don't get much air time in the medical device world, they are still important components of health care, and Arrow has a strong position in central venous catheters and other specialty catheters alongside rival Datascope
This is also a medical technology company with a "spicy meatball" angle. Specifically, Arrow is developing LVAD (left ventricular assist device) technology that could be superior to competitors like Abiomed
Despite its problems, Arrow has maintained pretty decent margins and almost squeaked out a double-digit return on equity. While this will never be a sexy pick like Motley Fool Rule Breakers pick Intuitive Surgical
For more healthy Foolishness:
- Respironics Still Breathes Freely
- Possis' Possible Pitfalls
- Intuitive Surges Into the Future
- ANSI's Got the Juice
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).