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Without further ado...
We've got a bona fide two-fer deal for you today. Natus Medical
What is, and what might be
Key to understanding Natus' growth story is that the core business, screening American newborns to determine whether they have hearing problems, is totally devoid of growth potential.
Well, almost. With Natus' products already holding a commanding 80%+ hospital market share, 95% of U.S. newborns already being tested for auditory difficulties, and unit sales growth tied to the rate of population growth, there's precious little upside to be had in gaining market share. But Natus has other options for growth. Both Hawkins and Murphy mentioned that one of Natus' signature disposable products, the Automated Auditory Brainstem Response (AABR) test, sold for about $8 last year, but today it costs $8.40 -- and is headed toward $9 in the near future. That's a tidy 5%-7% annual revenue boost on top of the population growth rate here at home. That's bad news for insurers that must pay for the tests, such as United Health
Overseas, the picture is similar, yet at the same time distinctly different. Again, Natus has 80% or better market share for its auditory screening products. But with newborn screening prevalent in just 25% to 30% of the developed world, and less than 1% in developing nations, Natus has significant paths to growth -- again, not in market share, but certainly in market penetration, population growth, and unit pricing.
And that's not all
A couple of years ago, before acquisitions of Bio-logic, Deltamed, and Olympic Medical began to suggest the shape of things to come, that might have been the beginning and end of the Natus story -- slow-growth and high-margin revenues at home, boosted by faster growth and unpredictable margins abroad. But like the infants for whom it cares, Natus seems determined to grow.
With annual revenues amounting to a mere $106 million in the trailing 12 months, Natus aims to double that number within 14 months. How does a hundred-mil company become a quarter-bil? Through a combination of organic and inorganic (through acquisitions) growth.
Organically speaking, Natus lays out its targeted revenue, by segment, like so:
• It aims to sell $100 million worth of newborn hearing-screening goods and services annually.
• Diagnostic hearing assessment offers another $100 million opportunity.
• EEG systems for neurological and sleep disorders -- $250 million.
• The "Cool-cap" product acquired with Olympic Medical this year adds $200 million.
• And we wrap up -- for now -- with cerebral EEG monitors at $150 million.
Put it all together, and Natus seems to be targeting a "market opportunity" of $800 million, or nearly eight times its current revenues. And that's just with the salable products currently sitting in its tool chest.
A brave new world...
Now, Natus doesn't tell us how long before it grows to $800 million in sales. The company's also a bit vague on whether by "market opportunity" it means the sales it can ultimately capture, or just the total size of the addressable market, of which Natus might perhaps imitate its 80% share in hearing screening, or win something a bit smaller.
What we do know, however, is that the $800 million market Natus describes to us could itself expand significantly, as the company moves into new fields of medical endeavor. In order to reach its stated goal of $250 million in annual sales by the end of next year, Natus plans to make $100 million-worth of new acquisitions -- one more by the end of this year, and others in 2008. While some of these purchases may address its current, expanded portfolio of market niches, the company's steady broadening of its efforts suggests to me that it will just as likely be entering new markets, and expanding its "market opportunity" (whatever that means.)
...and a confusing new world
Of course, with great opportunity comes a great confusion. If not a truism per se, this at least seems to be how things have worked for shareholders of companies such as Blackboard
As great as the organic growth story at Natus appears to be, it seems intent on swallowing companies equal to its own size in aggregate over the next year, and intent on adding perhaps $100 million in new debt to its balance sheet to fund the purchases.
If management sticks to its goal of paying no more than 1.5 times revenues for its purchases (half Natus' own valuation, by the way), and buying only businesses whose sales will be immediately accretive to Natus' own earnings, then I suspect the expansion will work out in the end. But in the meantime, expect to hear rumblings in Mr. Market's tummy as it strives to digest the results.
For a different point of view on the stock, check out Fool member dackerman21's recent posting on the HG: Watch List Stocks discussion board. dackerman21 examines Natus as it is, and as it might evolve, and works off the relative valuation of more mature medical products makers Medtronic