Analogic: A Tech, Healthcare And Aviation Security Play

Aug.23.13 | About: Analogic Corporation (ALOG)

Analogic Corporation (NASDAQ:ALOG) enables the world's medical imaging and aviation security technology, which are cyclical industries. The company grows revenue in the mid to high to single digits and recently acquired Ultrasonix Medical Corporation.

Analogic is a technology company that is leveraged to the healthcare sector and has a fast-growing, high-margin aviation security segment. Overall, the company underperformed the market, which means it has a decent chance to outperform the market. The pace of growth is solid and margins should expand as the aviation security segment becomes a larger portion of revenue. Thus, there is a pretty good chance that going forward Analogic will outperform the market.

Recently, the aviation security regulators in the United Kingdom and United States approved Analogic's new aviation security offerings, which means the firm can now benefit from the sale of those devices. COBRA is highly likely to allow flight passengers to keep their laptop computers and liquids in their carry-on baggage while going through security checkpoints.

Overall, I am bullish on the prospects for Analogic. My intrinsic value estimate is $78.69, but I think the share price can rise to the $80 to $95 area. On an absolute basis, the multiplier model valuations are cheap. I consider Analogic to be investment grade, which means I am focused on the amount of assets I allocate and not focused on stop loss levels.

Risks

  • Competition from existing or new companies in the medical and security imaging technology industries could cause Analogic to experience downward pressure on prices, fewer customer orders, reduced margins, the inability to take advantage of new business opportunities, and the loss of market share.
  • The annual and quarterly operating results are subject to fluctuations, which could affect the market price of the common stock.
  • The business could be harmed if management is unable to protect the intellectual property or if Analogic becomes subject to intellectual property infringement claims.
  • If the security and inspection systems fail to detect weapons, explosives or other devices that are used to commit a terrorist act, Analogic could be exposed to product liability and related claims for which it may not have adequate insurance coverage.
  • The company is investigating whether certain transactions between its Danish subsidiary, B-K Medical, and certain of its distributors may have violated applicable law, including Danish law and the U.S. Foreign Corrupt Practices Act; the outcome could adversely impact operating results.

Business Profile

Analogic Corporation is a high technology company that designs and manufactures advanced medical imaging, and security systems and subsystems sold to original equipment manufacturers and end users, primarily in the healthcare and airport security markets.

Analogic is recognized for advancing state-of-the-art technology in the areas of computed tomography ("CT") ultrasound, magnetic resonance imaging ("MRI"), digital mammography, and CT-based automated threat detection systems for airport security.

The company has three business segments -- Medical Imaging, Ultrasound, and Security Technology. The three segments are in order or largest to smallest by annual revenues. Security Technology is the growth and high-margin segment, which could benefit future consolidated results.

The Security Technology segment should benefit from the introduction of the COBRA check-point CT system. COBRA allows passengers to leave their liquids and laptop computers in their carry-on baggage when being screened at the check-point.

Analogic had three customers in the three and nine months ended April 30, 2013 and 2012 who individually accounted for 10% or more of total net revenue; those customers have bargaining power, a bearish valuations input.

The company depends on its suppliers, some of which are the sole source for certain components. Consequently, these suppliers have bargaining power, which could adversely impact profitability.

In March 2013, Analogic completed the acquisition of all of the outstanding equity securities of Ultrasonix Medical Corporation; Ultrasonix is a supplier of advanced ultrasound systems for point-of-care and general imaging applications. The estimates of the useful lives of developed technology and customer relationship seem lengthy; lengthy useful lives decrease Analogic's amortization expense, and increase net income and EPS. The acquisition increases Analogic's sales.

Recent Developments

  • The company is scheduled to release earnings September 12, 2013, at 5:00 p.m. ("ET").
  • The United Kingdom's Department for Transport approved COBRA.
  • The HI-SCAN 10080 XCT high-speed baggage scanner was approved by the U.S. Transportation Security Administration.

Financial Performance Forecast

Analogic revenue increases in the mid to high single digits. Given the industry, I think the company could grow at a long-term rate in the low- to mid-single digits. Management expects the company to grow in the mid- to high-single digits this year, which is partly attributable to the impact of the Ultrasonix acquisition. That said, I think the company's profitability will improve in the coming fiscal year, fiscal 2014, because of the restructuring plan as well as changing business mix.

Revenue in fiscal 2013 should be at least $553 million with the operating margin at 7% of revenue and the net profit margin at 5% to 6% of revenue.

Revenue in fiscal 2014 should be above $600 million with an operating margin close to 10% of revenue and a net profit margin around 6% to 7% of revenue.

The liquidity and solvency positions are rock solid. Also, there has been improvement in asset utilization. Further, based on my estimates, the return on equity should be above the cost of equity; in other words, the company should create wealth for investors.

Overall, my forecast for this company is bullish for the valuations.

Valuations

I will use discounted cash flows and multiplier models to value the common equity shares of Analogic. At the end, I will average the three valuation methods to determine the intrinsic value of the common equity shares. The current share price is $74.29.

Discounted cash flows models are sensitive to the inputs. I value the shares somewhere between $60 and $84; my growth assumption may be too low, so I am going to use the $84 per share estimate.

Now, I will determine the justified value. Using the same estimates as the previous model, I determine that the justified PE is 30.8. The current PE is 29.1. The intrinsic value using this model is $78.63.

In terms of the multiplier models, I don't consider the absolute values to be too expensive: currently, the company is trading at 1.9 times book and 1.7 times sales, and sales are growing in the high single digits. I think this company is cheap on an absolute basis. On a time-series basis, the company is off of its peak value and is nearing its fair value.

Next, I will use the historic average valuations. The intrinsic value using the price/earnings ratio is $132.24, using the price/book ratio is $58.65, using the price/sales ratio is $61.18, and using the price/cash flow ratio is $41.71. The average of those values and the intrinsic value using this model is $73.45.

Consequently, the average of the three models and the intrinsic value is $78.69; thus, Analogic could have about 6% upside. Adding some qualitative analysis to the valuations, I think this company could reach $80 and $95. Also, management is overdue to increase the dividend. I think this is a solid level to accumulate shares of Analogic: on an absolute basis, the company is cheap, and I forecast continued growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.