When a company does a secondary stock offering, it means one of two things: The company is suffering and needs to raise cash, or it's growing quickly and needs to raise cash. Both can be a scary proposition, but if you have confidence in management, the latter shouldn't cause the value of the company to shrink and might present a buying opportunity if other investors decide to sell.
Take, for instance, Natus Medical
Yes, I know the company sold almost 900,000 shares last month, but the Motley Fool Hidden Gems pick has proven that it can make strategic purchases at reasonable prices. Its most recent acquisition, Sonomed, is being bought at just 1.8 times annual sales based on the expected $6.3 million purchase price, and Sonomed earns gross margins close to 75%. Compare that to Natus, which has a market cap of about 3.6 times its trailing revenue on gross margins hovering around 63%.
Yet CEO Jim Hawkins characterizes the purchase as "a little more than the typical amount we pay." You've got to love tightwad CEOs.
Compare that to other acquisitions and partnerships in the health-care field that are a long way from benefiting the company opening up its coffers. There's GlaxoSmithKline's
Natus' acquisitions, on the other hand, usually have an immediate impact. By design. During last quarter's conference call, management said that it "look[s] for ... acquisitions to be immediately accretive in the first full quarter after acquisition." Tightwad CEOs that know how to grow earnings are great.
With management having a tight grip on the company's coffers, shareholders shouldn't be worried about the share dilution. Yes, they'll own a slightly smaller piece of the pie, but if Natus invests the money Foolishly, as it seems to have done so far, the pie will be much larger.
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Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer and Glaxo are Income Investor picks. Pfizer is also a recommendation of the Inside Value newsletter. The Fool's disclosure policy isn't for sale.