Use access key #2 to skip to page content.

TMFHelical (99.12)

Investing in Incontinence

Recs

12

December 04, 2007 – Comments (7)

Special Situation - Rocheseter Medical Corp (ROCM)

Bolstering Baby Boomer Bladders

Rochester Medical is a stock that Peter Lynch would love.  A company that no one would talk about at a cocktail party.  Rochester Medical Corporation (RMC) develops, manufactures, and markets urinary continence and urine drainage care products for the extended care and acute care markets in the United States and internationally.

It looks like a cheap microcap (140M) stock - with a P/E of 4.32, but it isn't.  A large chunk of cash in 2007 came from lawsuits settled with Bard, Premier, and Novation.  The recently filed 10k shows net income of 34.05 M including ~31 M form settlements.  Back out the settlements (but note that a lawsuit with Tyco is still pending) and you have earnings of just over 4M and a P/E of ~ 35.  And while this is high, note that sales increased at > 50% from 2007 over 2006 and earings in 2006 were only ~2M (so ~100% increase).  Gross margins improved from 35% in 2005 to 40% in 2006 and 52% in 2007.  Nice!

There are two factors that could drive this stock forward.  The first is that the settled lawsuits centered around anti-competitive business practices i.e. fraudulent attempts to keep customers from switching to ROCMs products.  If these practices are being halted, then the market should open up nicely for more aggressive growth and market share gain.

Second is the products, which is why ROCM should gain market share.  ROCM makes catheters coated with antibacterials, to prevent infection (a large problem).  They have some patent coverage in this area.  [The lawsuits were derived from competitors implying that ROCM product created superbugs].  These 'coated catheters' are more expensive but also more profitable.  The infection protection alone could justify the added cost, but, pile on that recent changes in medicare reimbursement policy denies reimbursement for expenses derived from 'Preventable Complications' (listen to the interview).  This will almost certainly include infections derived from urinary catheters - and ROCM has the product solution.

I mentioned top line growth and gross margins, but there are added operating costs.  ROCM is building out its sales force to meet demand, so expect these expenses to rise significantly to attempt to take advantage of this market opportunity.  And while some analysts might frown at rapidly expanding SG&A, give a listen to the conference call to hear one questioner all but get upset that the company wasn't being aggressive enough with sales staff expansion (17:33 to 24:22 min, the whole call is under half an hour).

I'm not a PayDirt subscriber, but I bet they would love this.

I'm inclined to make this a contest entry in the 2008 Biotech stock picking contest, but not sure even I can make the case that this is 'Biotech' (and my definition is pretty broad). I'm going bullish on this one for CAPS anyway. I mean how can you not love investing in incontenance (OK, that's gonna be the new blog title)

 

Ralph (Zz) 

7 Comments – Post Your Own

#1) On December 05, 2007 at 10:43 AM, GS751 (27.57) wrote:

enjoyed this post.  Keep em coming.

Report this comment
#2) On December 06, 2007 at 9:04 AM, TMFSarahGen (99.56) wrote:

Ralph, as always, great job!  And thank you for bringing another company I've never heard of to my attention!

From your blog post, I think I understand what they do and what the possibilities are going forward.  I don't think I understand why they are currently at a 52week low.  Did they miss earnings estimates? Get investigated by the SEC?  What's up?

Report this comment
#3) On December 06, 2007 at 10:03 AM, TMFHelical (99.12) wrote:

Sarah,

The company had a big spike in share price from the announcement of the settlement of lawsuits.  The cash infusion doubled the book value of the company.  It also was featured in a prominent magazine story.  I think many speculated that this would be a takeover target, and that hasn't played out.  Also, the company has been steady with increasing the sales force, but hasn't been extremely aggressive with this or capital expenditures (to increase production).  If you can, listen to the conference call and the segment I highlighted.  The analysts seemed annoyed that the company wasn't being extremely aggressive.

Listen to this link from May (video) - when the stock dropped for some insight.   ROCM is the opening commentary.  There was a lot of press around it as it went up - but it just isn't a sexy company. 

I don't know if this is a bottom, but it seems like a good time to nibble.  I am making this a pick in the contest on the biotechnology board, but don't have real money in it yet.  But I am very tempted.

Zz

Report this comment
#4) On December 06, 2007 at 11:56 PM, bystander1 (< 20) wrote:

Ralph,

The "analyst" to whom you refer in the conference call identifies himself as Manuel Asensio, a hedge fund manager and notorious short seller.  (See wikipedia.org or check out the web site www.asensioexposed.com for details). Kinda puts his "extremely aggressive" behavior in a different context, don't you think? Some think his hedge fund is behind the recent drop. Regardless, I think you're right to single this one out. Lots and lots of upside from here.

bs 

Report this comment
#5) On December 07, 2007 at 9:56 AM, TMFHelical (99.12) wrote:

bystander1

Thanks for pointing that out, I hadn't followed up on who he was.

Report this comment
#6) On December 07, 2007 at 11:32 AM, kristm (99.73) wrote:

Why isn't this about SHLD? Oh, wait, I thought you said investing in INCOMPETENCE! My bad!

Report this comment
#7) On December 19, 2007 at 3:48 PM, zygnoda (26.96) wrote:

touche!

Report this comment

Featured Broker Partners


Advertisement