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It’s rare to find companies where extreme growth is complemented with trading multiples near its competitors. Genoptix (GXDX) is a company with both; and the stock is a great long pick and great for near term trading.

GXDX currently trades at ~20X earnings in the ttm and less than 20X going forward based on consensus estimates. This about on par with its closest competitors Bio Reference Laboratories (NASDAQ:BRLI), Genzyme (GENZ), Quest Diagnostics (NYSE:DGX), and Lab Corp (NYSE:LH) who trade ttm at ~21X, ~29X, ~15X, and~15X respectively. What is anomalous about GXDX is its near triple estimated revenue CAGR over the last four years.

Revenues

2006A

2007A

2008A

2009E

CAGR

GXDX

24.02

59.33

113.21

183.12

97%

In millions US$

There is no doubt we will be seeing this phenomenal growth rate move to a more reasonable state as small cap companies become larger players in the market. This company still deserves a premium multiple because high growth should continue.

The overall market for CLIA labs is estimated at $52 billion and growing at 5-7 percent annually with blood cancer services (GXDX’s core competency) estimated well over 1 billion. Its estimated market share as of march 2009 is only seven percent. Its key growth drivers, case loads and ordering physicians continue to climb every quarter leading me to believe growth should remain strong in 2010.

The fundamentals are nothing short of outstanding.

So why is the short position at over 3.2 million shares with a fifteen million float?

  • Lack of a barrier to entry?
  • Fears of reduced reimbursements?
  • Easy to duplicate business model?
  • Market saturation issues?

These arguments are nothing new, and many of these arguments were present when the company filled its S-1. But are these concerns enough to weigh down on its tremendous upside?

While the market for blood and bone marrow cancers is limited, the company has some new areas in its pipelines: adding new testing capabilities including breast and colorectal cancers. Management has said it appears to be coming along smoothly and this management has been nothing but conservative since going public in 2007. Any future business added to its core collection of Compass and Chart I believe will do well with the personal relationships with hems/oncs (hematopathologists/oncologists). If the company cannot successfully expand organically into other testing capabilities, the large amount of cash could come in handy on the M&A front or acquiring new IP. The sales force should grow to 86 members by year’s end and the Company still only operates in 36 states.

Reimbursements will remain a concern going forward but CEO Tina Nova verified on the last conference call that reimbursements are expected to remain stable throughout 2010. Currently, Medicaid and Medicare constitute 36 percent of payers. Genoptix product offering are very efficient, especially when compared to in-hospital testing, which could easily justify the cost.

While the company lacks patented technology or IP, its human capital infrastructure has created strong relationships with community hems/oncs. Ordering physicians have grown to over 1300 last quarter according to the 09Q3 conference call. Hems/oncs have continued to be loyal and while no analyst has called GXDX’s revenue recurring, the company has experience something pretty close.

The fundamentals do support the current stock price.

The original VC firms have monetized their investments which we saw in the summer following outstanding quarters when stock prices actually dropped significantly. The stock price shot up with the rest of the market in the last 4 months at ~20x forward earnings. Maybe the price has gotten ahead of itself but this is just a tad higher than its low growth large cap competitors. It appears the excess liquidity which many believe has inflated the market overall has definitely affected this industry.

I do believe however that a lack of a sufficient downward catalyst, the pre-IPO insiders having already liquidated their positions, and the relatively low volatility make me believe a short squeeze is more probable than the significant downward price movement the shorts are looking for. Because the large position, the shorts might now provide a sufficient price floor. Although it is likely the stock will trade sideways in the near term, it still has a short squeeze upside, and the growth and value fundamentals that support a long position. In the short term I see it as very tradable in the next 3-6 months, and I estimate the probabilities as follows:

Stock Price

Probability

2010 Assumed Earnings Multiple Based on consensus of 1.88 EPS

<30

5%

≤16X

30-40

40%

18X

35-45

35%

21X

*45<

20%

≥24X

*45/share is overvalued in the short term and would probably only be due to short coverings.

I believe you can buy long right now even near its 52 week high because the fundamentals. You can trade it right now too because short coverings offer of protection from downside risk, and you still some chance to ride a short squeeze.

Sources: Boston.com, Genoptix presentation to investors at the 2009 Cowen conference, Company filings, Conference call Q2 2009, Conference call Q3 2009, Reuters.com, Yahoo.finance.com, Cnbc.com

Disclosure: Long GXDX.

Source: Genoptix: Fundamentals and Shorts Protect Against Long and Short Term Downside Risks