Urologix (NASDAQ:ULGX) is a micro-cap medical device company whose products and services address enlarged prostates. Only two brokerage firms provide analyst coverage: Stifel, Nicolaus and Unterberg, Towbin.
During the last conference call conducted by management at the end of January, the CEO and CFO both emphasized the company’s stabilization with respect to revenues and profit growth. They informed investors that 3Q results, ending Mar. 31, would increase modestly, both on a sequential and year-over-year basis. Analysts and investors applauded the transparency and sincerity of management’s comments with a noticeable increase in share price over the following few weeks, up about 25%.
Unfortunately, the momentum and confidence didn’t last long, and rightfully so. Independent analysts were uncovering uninspiring feedback through vendor and customer channels, indicating sales was significantly less than management had indicated. Not long after, management decided to release preliminary quarterly results (confirming what independent analysts had already uncovered) that 3Q revenues likely will be more than 15% below management’s guidance only two months prior. Remember, this is a small company, which generates about $25m of annual revenues. The margin of error of estimating revenues for such a short period is certainly not 15% to 20%. These are professionals being paid salaries of $250k to $500k+ to effectively manage the company, which on the most fundamental basis entails accurately forecasting sales one to two months in the future.
Here’s my motto, and a good lesson for management when providing guidance: Underestimate, over deliver. Never, ever do the opposite. Otherwise, refrain from doing so.
Nevertheless, after this sad display, ULGX’s stock price decreased to about $2.40, not much above its three-year low of $2.25, and well off its three-year high of $15.60.
On a positive note, this lack of confidence in management (execution mishaps and credibility issues) could lead to an opportunity, since the stock is nearing an attractive zone on a fundamental basis: EV/EBITDA is 8.0x. However, a key concern is sales growth, which has been declining significantly in the last twelve months (run rate of -25%). This latter point, I contend, is primarily attributable to poor management execution. Its products, especially if combined with a portfolio of related products, and demographic market (aging baby boomers) are both attractive.
Bottom line, this is a stock to study and follow (compare its technology to competitors, ask penetrating questions on the upcoming conference call scheduled on May 9, among other due diligence points). Importantly, recognize that a hedge fund (BlueLine Partners based in Walnut Creek, CA) holds an 8.0% stake in the company. It invested mostly during 1H 2006 at an average price of $3.88. Note, too, that the fund specializes in medical device companies and dubs itself an “activist,” So, if management continues to not execute, BlueLine is more likely to exert its influence to “facilitate” change through a management shake-up or a sale to a larger competitor.