Small-cap companies are among my favorite to research, because you can often uncover great stocks that analysts have neglected or simply not discovered yet. These tiny businesses can offer the ultimate risk-vs.-reward ratio. But they're not for the faint of heart.

I've dedicated this 10-week series toward finding the 10 small caps to rule them all. The previous eight choices are:

This week, I want to highlight a steady growth story in the medical-supplies sector: ICU Medical (Nasdaq: ICUI).

What it does
ICU Medical develops and sells disposable medical-connection devices that protect patients from bloodstream infections and healthcare workers from accidental needle pricks. The company's primary product is the CLAVE, a needleless IV connector, but it also produces custom IV systems, oncology products, and the new TEGO connector, which is used for the renal dialysis market.

How it stacks up
Back in December, I profiled the pros and cons of ICU Medical and determined that the most immediate threats to the company were its sinking gross margins and domestic competition. Integration costs were also running higher than normal, since the company purchased its critical-care line from Hospira (NYSE: HSP) in 2009.

How have things stacked up for the company since then? Incredibly well!

In its latest quarterly filing, the company highlighted a 10% increase in domestic revenue, coupled with a 7% jump in international sales. ICU attributed its growth to a good product mix and better-than-expected manufacturing efficiencies. This quarter also marked ICU's fourth consecutive double-digit earnings beat, topped off with a 670-basis-point jump in gross margin. ICU has addressed all of my major concerns and made significant strides in cutting expenses while expanding sales.


2011 Expected Revenue Growth

Average Earnings Beat in Past 4 Quarters

ICU Medical



Becton, Dickinson (NYSE: BDX)



Baxter International (NYSE: BAX)



Insulet (Nasdaq: PODD)



Cantel Medical (NYSE: CMN)



Merit Medical Systems (Nasdaq: MMSI)



No, that's not a misprint -- ICU has averaged a 36% earnings beat in the past four quarters. It may appear to lag medical-device competitors Insulet and Merit Medical in growth, but considering that Insulet is still far from profitable and Merit Medical trades at more than twice ICU's trailing-12-month P/E, you can understand why I feel so strongly about ICU's success. Why bother with larger rivals Becton, Dickinson and Baxter International when you can get a considerably higher growth rate?

How it could make you money
ICU Medical has two things going for it that are currently flying under the radar: the balance sheet and its international sales.

ICU's balance sheet is rich, with a growing pile of cash on hand. The company currently has $106.8 million in cash with no debt and generated more than $15 million in operating cash flow last quarter. This cash allows the company to continuously explore joint-venture and acquisition opportunities and also makes it an attractive takeover candidate for larger companies -- many of which are deeply leveraged in debt.

With fierce domestic competition for medical devices, the company must be innovative and increase its international presence. So far, ICU has done just that, with international sales becoming a greater piece of its revenue pie. Having fewer competitors abroad means a potentially larger revenue stream, as well as healthier margins for ICU.

Whether ICU grows organically or attracts the attention of a larger rival, its share price looks relatively cheap to me -- even after its recent run-up. For that reason, it deserves a spot among the 10 small caps to rule them all.

What's your take on ICU Medical? Share your thoughts in the comments section below, and consider adding ICU Medical, as well as your own personalized list of companies, to My Watchlist.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.