Genoptix: Magic Formula Stock or Magic Value Trap?

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 |  Includes: CLRT, DGX, LH, NVS
by: Gaurav Sharma

Looks like a good value stock.......now let's find out if its a trap.

  • As of 07/30/2010 the stock has fallen 56% from its high.
  • Cash = $140 M = 7.7$/share
  • Market Cap = 300M = 17.19/share
  • FCF for 2009 = 30, 2008 = 22,2007 = 12.5
  • Has had tremendous growth in the past.
  • Does out of clinic blood evaluation and suggests treatments. Currently, oncologists are being squeezed. They are being paid the same amount even though costs are rising and hence they are looking to reduce expenses. Also, uninsured patients are increasing. Besides that competition is increasing as described below.

  • CEO pay

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  • The CEO has most of her options issued at a striker price of 1.24 so she does not have the same incentive as the other stock holders in the stock going up. Also, equity compensation is only 20% of her total pay.

The company is expanding significantly. Sam Riccitelli, Genoptix EVP and COO, said:

Our operational capacity is growing as we continue to build our franchise, currently with 90 sales representatives in the field and 43 hematopathologists on staff with Cartesian Medical Group. We believe we have assembled the largest group of hematopathologists on one laboratory campus in the U.S. With the completion of our laboratory expansion earlier this month and our customer service center this fall, we will have the infrastructure in place to aggressively pursue our growth strategies through 2013.

Performance Outlook
Genoptix is reaffirming guidance for the full-year 2010 with revenue expected to be approximately $210 million and full-year gross margins in the mid- to high-fiftieth percentile.

Operating margins for 2010 are expected to be in the high teens as a percentage of revenue, with net income of approximately $22 million and diluted EPS of approximately $1.20 on 18.3 million shares. This assumes a tax rate of approximately 46% for the year.

Based on continued infrastructure expansion and implementation of its strategic plan, the Company projects capital expenditures of approximately $30 million for the full-year 2010, including approximately $22 million in new facilities expansion costs and $8 million in maintenance capital.

  • Basically the company is continuing to expand into 2010 as per their initial plans without taking into consideration the changed game rules. In my opinion evolution teaches us that the best chances of survival are not for those who are the strongest or fastest or cleverest but for those who are willing and able to adapt to the changing environment. This company does not seem to know this and hence I believe the business troubles might be more than temporary.
  • Bottom line: My guess is the company needs 8-10 M$ for maintenance. Assuming it's able to hold onto its 20M$ per year net income forecast forever I would be willing to pay 10*10+140 = 240 Million for this company which is equal to 13.7$/share. But you must revaluate this price if you think that 20M$/year is not achievable mainly for competitive reasons.

Disclosure: No positions