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We screened through all the top performing industries looking for companies that might be potential buy candidates. We found just one that interests us, Orthovita Corporation (VITA).

Orthovita is a spine and orthopedic biosurgery company with proprietary biomaterials and biologic technologies for the development and commercialization of synthetic, biologically active, tissue engineering products. It develops and markets synthetic-based biomaterials products for use in spine surgery, the repair of fractures and a broad range of clinical needs in the trauma, joint reconstruction, revision and extremities markets.

Despite the economic freefall, VITA’s sales are headed in the right direction. For its third quarter, sales increased 42% to $20.6 million as compared to $14.5 million for Q3 2007. In fact, the 3rd quarter sales were up 7% versus the second quarter of ’08. Year-to-date, VITA’s 2008 sales increased 32% to $56.1 million as compared to $42.5 million for the same period in 2007.

This rapid growth has led management to raise full-year 2008 sales guidance to about 30% growth over 2007 from previous guidance of 20% to 25% growth. So far Orthovita has yet to produce a profit. That’s probably why it trades around $3.00 per share. Analysts don’t expect the medical products company to turn a profit for the next year or two. However, we feel that is subject to change.

Last quarter the company only lost 2 cents per share versus the consensus earnings estimate of a 5 cent loss. Management failed to provide guidance for 2009 during its last conference call. Instead, they are holding out until they report year end numbers early in ’09. We wouldn’t be surprised to hear them utter the magical words; we expect to turn a quarterly profit by year’s end. Such an announcement would, in our view, drive the share price higher.

Right now, the 12 month consensus price target is $4 per share. There are a few paths we think VITA’s shares can take to get there.

  1. They announce they will turn a profit in 2009 during the 4th quarter conference call.
  2. The stock currently trades at 3.25 times sales. While it is a little pricey for our liking, with a projected growth rate of 56% for 2009, we believe VITA can maintain its current price-to-sales ratio. At 3.25 times 2009’s projected revenue of $93 million, VITA is a $4 stock.
  3. VITA has a medical device under review for approval with the FDA. Cortoss is a high strength, bonding, self-setting composite which has been engineered specifically to mimic the characteristics of human cortical bone. Cortoss is intended for use in the treatment of compression fractures of vertebral bodies and in orthopaedic procedures where bone screws of fixation devices cannot be sufficiently tightened or have stripped and lost purchase.While it is approved for use in the European Union and Australia, an FDA approval in 2009 would go a long way in pushing the stock towards $4.
  4. As always with these smaller high growth medical companies, a Cortoss approval and continued execution could catch the eye of a bigger fish. Orthovita’s portfolio of products might be a nice fit with a company like Stryker Corporation (SYK).

Disclosure: no position currently

Source: Orthovita Showing Some Spine