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Inverness Medical

February 20, 2009 – Comments (0) | RELATED TICKERS: IMA

Inverness Medical Innovations (NYSE:IMA) engages in the development of consumer medical diagnostic products. Specifically, the company is a supplier of consumer pregnancy and fertility tests and other rapid point-of-care diagnostics. It also offers a range of vitamins and nutritional supplements.

Inverness Medical is profiting from the growing home diagnostic trend. The company has taken its products global and is looking to add more monitoring systems to its pipeline. Management has a proven track record in technology and innovation and also has a significant equity stake in the company.

 

 

Growth drivers:

 

Growing political support for health-care reform.Health-care system is trending away from an activity-driven reimbursement system to a quality-driven reimbursement system.Wellness testing is a crucial component to reduce overall health-care costs.Inverness is a defensive growth stock.

 

 

The company is difficult to value, mainly because most of its growth has come through acquisition. As a result, projecting future sales and earnings can be tricky. Additionally, sales on a GAAP basis are negative. An easy way around using traditional earnings metrics is to look at the company’s cash flows and Non-GAAP income. Here we see that the company actually earned $2.04 in 2008 and is expected to earn $2.56 this year.

 

We will use Non-GAAP EPS estimates to value the stock. This method removes one-time items and acquisition-related costs. We project that the company will earn $2.56 this year and grow earnings 17% to $2.99 in 2010. Shares currently trade at 9 times our 2010 EPS estimate, which is shocking. Fair value for such a company is at least 16 times forward earnings, but we understand the uncertainties in the market place, as well as the uncertainties commonly associated with acquisitions. Accordingly, we are depressing our fair value multiple down to 12.5, which results in a one year target price of $37.