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In a previous post, I indicated that Lifecell (LIFC) was one of my larger positions. I believe it might be useful to illustrate the reasons I see value in this small-cap biotech. My reasons are strategic, fundamental, and technical.

Strategically, Lifecell is a key player in the Human Tissue Industry, which has turned a corner in society in terms of acceptability and utility. As medicine has broken new ground, and confidence has grown in the ability to operate effectively on burn victims, patients involved in serious accidents as well as people looking to "augment" themselves, physicians are sourcing LifeCell's patented industry-leading Alloderm product more and more, to the tune of 900,000 grafts since Alloderm was engineered back in 1994.

Fundamentally, let's look at the numbers:

At an operating margin of 21.67%, an ROE of 16.61%, and no debt on the books, this is a sound company, despite its small-cap stature. Earnings clock in at $0.37 in FY'05, expected at $0.53 in FY'06 and $0.75 in FY'07. Revenues appear to be growing at 40% annually, so earnings growth at the same rate is a little conservative, in my opinion. Assuming earnings grow at 50% annually, and applying a P/E of 60 to our "real" expectations of $0.59 in FY'06 brings us to a fair value of $35.40 or a 20% upside to the current market price.

Technically, this stock has been a stalwart, despite the rough waters that it (and all other equities) have had to negotiate over the last 6 weeks. An 8-week cup with handle formation has been created after breaking out on a phenomenal earnings report in which LIFC trounced analysts' estimates by 33%.

LIFC broke out above 25 and has maintained its position above the 25 mark while forming it's current cup w/handle formation. Expect that when this market finally gets back in a buying mode that this stock will continue its "stalled" breakout from 2 months ago. Although fundamentally, fair value is ~$35, technically, this stock has set itself up to potentially make a run to $50-$60 over the next 4-6 months.

I rate it a strong buy.

LIFC 1-yr chart:

Full disclosure: Author is long LIFC

Source: The Bull Case for Smallcap Biotech Company Lifecell