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Genoptix, Inc. - A Vampire Stock

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July 26, 2010 – Comments (0) | RELATED TICKERS: GXDX.DL , GENZ.DL , DGX

Over the weekend we noticed and article on a blog site that called Goldman Sachs a "great vampire squid that was relentlessly jamming its blood funnel into anything that smells like money."

This sounded a bit crass to us, that is until we thought about companies like Genzyme Corporation (Nasdaq: GENZ), and Quest Diagnostics, Inc. (NYSE: DGX). Taking a few minutes to contemplate those companies, we realized they do the exact same thing as Goldman Sachs.

Not only are they constantly trying to stick their collective blood funnels into anything that smells like money, they also get paid extra to analyze any blood they may have actually drawn in their quest for cash.

And that made us wonder. If we were going to invest in a vampire company, which one would it be? Certainly there are a number to choose from and indeed in June 2009, we were contracted to produce a Raw Value Report on Quest Diagnostics, Inc., which we subsequently posted on our blog site.

After a bit of contemplation, we remembered seeing a paragraph on the Magic Diligence site about Genoptix, Inc. (Nasdaq: GXDX), which if memory served, was a true vampire company.

So with a necklace of garlic around or necks and carrying a stake and a hammer, off we went to determine if Genoptix was truly an investable vampire.

Basis
Financial information related to Gneoptix, Inc. contained in this report, is based on the company’s most recent SEC Form 10-K filing for year ending December 31, 2009, as filed with the Securities and Exchange Commission on February 25, 2010.

What They Do

The company is a specialized laboratory service provider focused on delivering personalized and comprehensive diagnostic services to community-based hematologists and oncologists utilizing sophisticated diagnostic technologies to provide a differentiated, specialized and integrated assessment of a patient’s condition, aiding hematologists and oncologists in making vital decisions concerning the treatment of malignancies of the blood and bone marrow, as well as other forms of cancer.

The company's key service offerings, COMPASSSM and CHART®, are designed to meet the specific needs of community-based hematologists and oncologists.

The company's COMPASS service offering includes the determination by company hempaths of the appropriate diagnostic tests to be conducted and the performance of these tests. The results are then synthesized and summarized into an easy to read comprehensive report.

The company's CHART® service offering combines multiple COMPASS assessments and analyses of disease progression after intervening clinical action, providing hematologists and oncologists with a valuable diagnostic tool to track both a patient’s disease and as well as response to the hematologists and oncologists prescribed treatment regimen over time.

The company's revenue growth rate reflects the value of its differentiated service offerings to these community-based hematologists and oncologists, with a revenues increase of 59% for FY09, and an income increase over the same period of 102%.

The company was incorporated in Delaware in January 1999, with principal executive offices currently in Carlsbad, California.

Short-Term Investment
The stock closed recently at $17.52 with Resistance at $21.03, a 20% increase from its recent close, and Support at $15.50, a 12% decline from its recent close. Normally an 8% delta would not get our attention when it comes to a short-term investment, but the stock is currently in a down trend, and a appears to be coming off a bottom, with the Stochastic setting up for near term sideways movement.

Clearly, we missed our entry point back in early July, which would have allowed us to take a short-term position and then roll that position into a long-term position. But hindsight is 20/20 and unfortunately we have to play the hand we are dealt, assuming we want to play.

Accordingly, we think a better time to take a short-term position will be after the trend has turned positive, something that could happen over the course of the next couple of weeks.

Long-Term (5 Year Hold) Investment

We last looked at the Genoptix in December 2009, and at the time we were pleasantly impressed with the company's financials. According to a few of the napkin notes we made at the time, we believed that the stock price had gotten a bit ahead of itself, trading in the mid $30s at that time.

We noted then that Free Cash Flow could be better, but Return on Invested Capital was adequate.

Seven months later, we note that while Free Cash Flow improved to $1.76 per share, Return on Invested Capital fell from 30% to 20%. Granted the company is experiencing steady growth with Revenues increasing 59% year over year.

But the thing that has us puzzled is the company's 10-K note that Income increased 102% year over year. While this is indeed true, we note that earnings, which is what we are paying for, increased only 12% year over year. And while that may seem like a nice gain, consider that the company is a small cap company, so large increases in earnings are just not that uncommon.

Still, of the 17 metrics we like to focus on, 78% of them were what we consider investment quality for FY09, while only 66% were investment quality for FY09. This tells us that management's collective head is in the game and that they are paying attention not only to the company's customers, but to current economic conditions as well.

Valuations

Based on review of the company's FY09 financials, we believe a Reasonable Value Estimate for the stock is around $41, which would put our Buy Target around $24. Factoring in our Risk Adjustment reduces our Buy Target to around $19, which based on the stock's recent $17.52 close, makes this one a buy.

Final Thoughts

The wind howls, the thunder lights the summer sky, and the rain obscures the vision of all but the luckiest of travelers. Indeed there are many vampires in the investing world whose single goal is to separate unwary individual investors from the their hard earned money, to take from them and from their families, their life blood.

For decades, these bloodsuckers have been successful in their quest. But as time passes and individual investors become better and better skilled at seeing value, and then taking their time to evaluate the value they have found, the influence of these leeches will diminish, until one day, the parasites will simply be no more.

Wax

Worksheet
To download the Genoptix, Inc. Raw Value Worksheet, please click here.

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