Cardiac Science Corporation: Feeling much better, thanks.
Cardiac Science Corporation (Nasdaq:CSCX) was in poor health 18 months ago. Sales of the Bothell, Wash.-based company’s heart monitoring equipment were slowing, competition was tough and the stress undeniably affected its ticker: in one year, its stock dropped about 38%, to $7.25 in September 2006, an all-time low.
The patient is doing much better today, though, thanks to a turnaround in its heart monitoring equipment business and strong growth in sales of automated external defibrillators (AEDs), portable devices for shocking a heart back into rhythm after a heart attack. AEDs are cheaper (about $1,000) versions of the defibrillators seen in every medical show ever aired, which cost about $10,000 apiece. AEDs are popular devices these days, sold to airports, corporations and government agencies to jump start ailing hearts even before the ambulance arrives.
In the fourth quarter of 2007, sales rose 29% from a year earlier, to $50.4 million, pushed up by 45% growth in AED sales and 16% growth in monitoring equipment. That broke a losing streak in which monitoring revenue had declined year-to-year for six quarters straight. Net income was $2.37 million, compared to a $35,000 loss a year earlier.
Its stock price, however, has not fully reflected its recovery. It topped out at $11.50 in July, 2007, and closed at $8.16 on Tuesday. Its 52-week low was $7.35, reached last December.
For that reason, analysts see it as a good buying opportunity. “CSCX has recently experienced a sell-off which we believe is overdone,” wrote Sun Trust Robinson Humphrey analyst Jonathan Block on Jan. 8. The stock is now trading at just 0.9 times his estimated 2008 revenues of $202 million (its market cap is $186 million.) Block projects earnings of $0.37 per share in 2008, up from $0.24 per share last year. His target price is $14, a 1.5 times multiple of 2008 revenues, still below the 2 times forward revenues its peer group averages.
One reason for the lack of stock movement may be that only two brokers follow the company currently, although both rate it a “buy.” Dalton Chandler at Needham & Co. has a target price of $12 and says “the company has excellent momentum in the AED business.”
Cardiac Science was formed in 2005 from the merger of Cardiac Science Inc. and Quinton Cardiology Systems. Quinton, the inventor of the cardiac treadmill, was founded in 1953, and sold an array of heart monitoring and treatment devices. Cardiac Science added the hot-selling AEDs to the mix.
Cardiac Science and competitor Zoll Medical Corp. (Read our Feb. 19 Spotlight on the company here) both benefited from the fact that other medical equipment makers, including market leader Physio-Control Inc., a subsidiary of Medtronic, Inc. (NYSE:MDT), had to pull their AEDs off the market in the United States after allegations of quality problems. Unlike Zoll, though, Cardiac Science was being dragged down by its older products, notably the heart monitoring business.
Last year, Cardiac Science management overhauled its selling channels. It used to sell its most expensive heart monitors only to hospitals, and lower end monitors to doctors’ offices. It consolidated the lines, allowing more cross-selling and upgrade sales, bringing about the turnaround. “Cardiac Science has a strong management team for a company of its size,” says Chandler. “They managed the turnaround well.”
Competition is destined to increase. Physio-Control will re-enter the U.S. market, probably this year. “Growth will slow for all the competitors when that happens,” says Chandler. But both analysts believe Cardiac Science has accounted for that possibility with very conservative growth projections of $200 million revenues in 2008, up 10%.
It will also take a couple years for Physio-Control to rebuild its momentum. Further, it gets most of its business from selling the expensive defibrillators to hospitals, and a recent round of layoffs last year mostly hit its AED division.
Analysts also think there is still plenty of room for growth in the AED business internationally, and see momentum for sales into schools and corporations. “It makes sense to have AEDs even in small companies with just 20 or 30 employees,” says Block.
Finally, Cardiac Science has been winning some good deals recently. On Feb. 23, it announced contracts to sell several hundred AEDs to Cummins Engine and engineering and construction company CH2M HILL. On March 11, it announced an order for 282 electrocardiograph systems from Mexico's Instituto de Seguridad y Servicios Sociales de los Trabajadores del Estado, a hospital network for government workers.
All Cardiac Science (CSCX) needs now is for investors to sit up and notice that this stock is off the critical list.
