Aleksandra Prokop
Sunday, April 22, 2007
Natus Medical, Inc. (BABY)
Closing Price: 18.10
General Pitch
Natus is a BUY as this is the perfect opportunity to take advantage of this solid company poised for
relatively large growth in the near future.
Background
The Sector (Medical Appliances and Equipment)
The Medical Appliances and Equipment sector of the Health Care industry is unique in that
it is almost wholly focused on creating products for health care providers rather than direct
consumers. The sector encompasses a wide variety of products ranging from diagnostic tools to
monitoring systems to general hospital equipment (such as hospital beds, machines, and other
related products). Like most health care sectors, Medical Appliances and Equipment faces some
rather extensive day-to-day volatility. However, the nature of the sector’s products and services and
the limited number direct-to-consumer purchases make this sector a little less vulnerable to
economic and consumer-induced fluctuations. The sector’s market cap leader and most famous
corporation is Medtronic, Inc.
The Company
Natus Medical, Inc. was founded in 1987 in San Carlos, California where the company’s
headquarters are still located. Natus’s website cites its goal as being, “To improve outcomes and
patient care in target markets through innovative screening, diagnostic & treatment solutions”1 with
a focus on infant care. They have a wide range of diagnostic tools as well as products to help
children with a variety of diseases, most notably hearing impairment. Their five major product
categories are Newborn Hearing Screening, Diagnostic Hearing Assessment, Monitoring Systems
for Neurology, Diagnostic Sleep Analysis and Newborn Care, including treatment for brain injury
and jaundice Recently the company has expanded its product line through three major acquisitions
(Bio-logic Systems Corporation, Deltamed S.A. and Olympic Medical, Inc.) and is becoming more
involved in creating data management systems. Natus provides products both directly and through
distributors to doctors, hospitals, nurses, and government agencies, and has a global presence in
over 80 countries worldwide.
1
Natus Corporate Profile. http://www.natus.com/index.cfm?page=company_1&crid=2
Leadership
Jim Hawkins = CEO (April 2004)2
Steven J. Murphy = CFO (February 2006)
Dr. Christopher Chung, MD = In charge of R&D (June 2003)
Mostly educated on the west coast, Natus management is seen as rather conservative and invested in
the long-term growth of the company. Their three acquisitions from the last year thus suggest that
these were all great buys that have large potential for the company3.
2
Natus Corporate Profile.
The Motley Fool. Natus Medical vs. Under Armor. http://www.fool.com/investing/general/2007/03/16/natusmedical-vs-under-armour-natus-medical.aspx
3
Competition
DIRECT COMPETITOR COMPARISON4
BABY
Pvt1
VAS
Pvt2
Industry
Market Cap:
373.56M
N/A
1.11B
N/A
238.14M
Employees:
360
N/A
2,365
N/A
293
127.80%
N/A
18.60%
N/A
12.50%
Revenue (ttm):
89.92M
N/A
610.42M
N/A
78.40M
Gross Margin (ttm):
62.69%
N/A
47.69%
N/A
52.59%
EBITDA (ttm):
18.02M
N/A
96.18M
N/A
5.18M
Oper Margins (ttm):
14.12%
N/A
10.08%
N/A
1.60%
-927.00K
N/A
28.99M
N/A
-998.25K
EPS (ttm):
-0.047
N/A
0.871
N/A
N/A
P/E (ttm):
N/A
N/A
38.69
N/A
27.82
PEG (5 yr expected):
0.78
N/A
1.32
N/A
1.47
P/S (ttm):
4.09
N/A
1.83
N/A
3.61
Qtrly Rev Growth (yoy):
Net Income (ttm):
Natus is in a unique position in that most of their direct competition is privately owned and
thus an unlikely stock competitor at this point. As an added strong point, Natus will often partner
with competitors in large-scale initiatives (such as Welch Allyn and a recent focus on improving
hearing impairment products). Thus, the company obviously has a strong understanding of who
their competition is and continuously keeps an eye on this competition.
While much smaller than other healthcare industry leaders (such as Medtronic or even a
closer competitor, Viasys), Natus has more room to grow in a strong niche market that still has the
advantage of a wide range of products. Natus is the only sector leader to have specific segments
dedicated to infant care.
Out of the whole sector, Natus has a much lower PEG, suggesting that the company is
highly undervalued currently. Thus, it may be the perfect time to take advantage of this favorable
position.
4
Yahoo Finance.
Investment Risks
The greatest investment risks that Natus faces right now involve its recent acquisitions.
Having made three major corporate purchases, the company’s balance sheet looks relatively week
right now with income in the negative range.
Another factor of concern with Natus is that it does not have a history of moving very
quickly. It is a slow, steady grower that may not show incredible stock returns in the next few
months.
Investment Opportunities
In its favor, Natus finds itself in the dominant position of a niche market with a wide variety
of products and services. This position is reflected in the fact that the company is facing substantial
quarterly revenue growth (it is fourth out of 111 companies in the sector) and has a great operating
margin. Furthermore, its strong management team and the high level of positive PR around the
company’s products suggest that Natus is in a good place as a corporation overall.
In response to the fact that Natus faces a negative income statement, this is easily explained
by its recent acquisitions. With three new company’s under its belt, Natus is just getting ready to
surface from its previous low balance sheet. Although a slightly more aggressive strategy than
before, the purchasing of these companies is a signal from the management that they have faith in
the company’s ability to handle this change and that these are promising prospects. The fact that one
of Natus’s newest product awards was just received for a product manufactured under one of its
acquisitions speaks in favor of this viewpoint.
While not usually a huge grower, Natus is primed for one of its strongest growth spurts since
going public in 2001. In the next year or so Natus should begin to reap the rewards of its latest
acquistions, come out of its balance sheet concerns, and find its stock price reflecting its newly
strengthened position within the sector.
Financials5
Revenue
Cost of revenue
Gross profit
Operating expenses:
Marketing and selling
Research and development
General and administrative
Acquired in-process research and development
Restructuring
Total operating expenses
Income (loss) from operations
Other income, net
Income (loss) before provision for income tax
Provision for income tax
Income (loss) from continuing operations
Discontinued operations
Net income (loss)
Earnings (loss) per share:
Basic
Continuing operations
Discontinued operations
Net income (loss)
$
$
$
$
89,915 $
33,665
56,250
43,045 $
16,092
26,953
36,506
15,015
21,491
21,944
10,604
11,004
9,800
—
53,352
2,898
225
3,123
4,050
(927)
—
(927) $
11,396
4,318
5,806
—
—
21,520
5,433
1,228
6,661
509
6,152
—
6,152 $
11,305
3,672
6,626
470
776
22,849
(1,358)
310
(1,048)
297
(1,345)
(1,062)
(2,407)
(0.05) $
—
(0.05) $
0.35 $
—
0.35 $
(0.08)
(0.06)
(0.14)
Operating activities:
Net income (loss)
$ (927) $
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Acquired in-process research and development
9,800
Accounts receivable reserves
18
Excess tax benefits on the exercise of stock options
(1,051)
Inventory reserves
278
Depreciation and amortization
3,921
Loss on disposal of property and equipment
—
Warranty reserves
553
Share based compensation
1,405
Changes in operating assets and liabilities, net of assets and liabilities acquired
in acquisitions:
Accounts receivable
(5,683)
Inventories
(2,045)
Other assets
(1,271)
Accounts payable
(201)
Deferred taxes
(1,899)
Accrued liabilities
(493)
Deferred revenue
828
Net cash provided by operating activities
3,233
5
Official EDGAC online filing of the company’s 2006 10-K.
6,152 $ (2,407)
—
(253)
—
25
1,988
—
206
—
470
82
—
529
1,849
643
83
367
(1,567)
840
(465)
(131)
(930)
1,858
160
7,883
(769)
903
(95)
(125)
—
1,487
(221)
2,796
Investing activities:
Acquisition of businesses, net of cash acquired
Sale of land, net of costs
Acquisition of property and equipment
Deposits and other assets
Purchases of short-term investments
Sales of short-term investments
Redemption (purchase) of long term investment
Net cash provided by (used in) investing activities
(71,773)
(480) (5,401)
2,492
—
—
(2,432)
(931) (1,876)
83
10
79
— (24,866) (31,976)
12,163 32,188 40,779
—
—
341
(59,467)
Valuation6
VALUATION MEASURES
Market Cap (intraday):
365.83M
Enterprise Value (10-Apr-07)3:
358.38M
Trailing P/E (ttm, intraday):
N/A
Forward P/E (fye 31-Dec-08) 1:
25.43
PEG Ratio (5 yr expected):
0.80
Price/Sales (ttm):
4.16
Price/Book (mrq):
3.69
Enterprise Value/Revenue (ttm)3:
3.99
Enterprise Value/EBITDA (ttm)3:
19.884
Forward PE = 25. 3
The forward PE is high, however this may signal that people are valuing the stock highly and that it
will likely face even more impressive growth in the near future.
Initial Public Offering (2001) = $11.00
Most recent drop = around March 2006 when there was an announcement in the increase of
common stock to finance activities such as debt and proposed acquisitions.
6
Yahoo Finance.
Splits:none
Reiteration of the Pitch
This would be the perfect time to buy this relatively steady performer. Natus may get some
unexpected growth in the next few years, while R&D and pipeline products in established parts of
the business continue to be strong. This would bring the stock price up in the near future. A good
sell price, based on the company’s performance in the last year and consideration of the factors
mentioned above, is estimated at about $23.