At first glance, there is much to like about Motley Fool Hidden Gems recommendation PolyMedica (NASDAQ:PLMD). The company, whose products focus on treating diabetes, has risen more than 20% from where the stock was 52 weeks ago -- handily beating the performance of the Standard & Poor's 500. And analysts are expecting the company to grow earnings by 20% annually for the next five years.
Alas, first glances can be deceiving. Yesterday, PolyMedica reported first-quarter results that were disappointing. Sales, compared with the same quarter last year, rose 6% and met analyst expectations. Net income, on the other hand, was down 11.7%, a penny shy of estimates.
Hurting results was a 31.8% decrease in revenue from the smallest of the company's three divisions, Liberty Respiratory, which provides a reliable way for patients to get respiratory medications at home. In yesterday's earnings release, the CEO announced that PolyMedica would exit this business because reimbursement rates have been reduced dramatically and future rates remain uncertain.
You have to wonder why it took this long to make this decision. The company had expressed grave concern about the impact of declining reimbursement rates for calendar year 2005 as far back as December 2003: It also decided to suspend its television advertising for this business at that time. Respiratory sales for the first three months of calendar 2005 were off 41.9%.
The story is much different at the company's largest unit, Liberty Diabetes, which accounted for 70.6% of this quarter's sales. The U.S.'s largest provider of blood glucose testing and related supplies managed a 6% increase in sales (compared with the year-ago quarter) even after a 3% cut in reimbursement rates for diabetes test kits that took effect January 1, 2005.
With 800,000 newly diagnosed cases every year in the U.S., diabetes is one of the fastest-growing diseases. PolyMedica is well-positioned to benefit from this alarming trend and is three times larger than its next-largest diabetes testing supplies competitor. The company will jump into the growing commercial market with its recently announced $55 million acquisition, which will mildly impact current-year earnings.
The standout success this quarter was the company's direct mail pharmacy, where sales increased by 40.9%, which accounted for 20.2% of total sales. The company is using direct-to-consumer marketing to drive patients with chronic diseases to its pharmacy.
A recent $150 million Dutch auction reduced the number of shares outstanding by 14.2%. A five-year, $150 million revolving credit facility is now in place to allow this previously cash-rich company to grow earnings more rapidly through share buybacks and acquisitions.
The stock is trading at 18 times current fiscal year earnings -- and pays a 1.7% dividend. Given the share buybacks and PolyMedica's willingness to exit its faltering respiratory business, 20% annual earnings growth per share looks attainable. At current prices, the stock appears attractive.
There are plenty of companies that sell medical supplies -- Bristol-Myers Squibb (NYSE:BMY), Forest Labs (NYSE:FRX), and Teva Pharmaceutical (NASDAQ:TEVA) come to mind -- but supplies are not their primary focus. PolyMedica offers a unique way to buy a growing and market-dominant diabetes-supply company with a small but rapidly growing online pharmacy.
Maybe there's something in first glances after all.
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Fool contributor W.D. Crotty does not own shares in PolyMedica. Click here to see The Motley Fool's disclosure policy.
