ArthroCare Corporation: Simply Magical

| About: ArthroCare Corporation (ARTC)

Arthrocare Corp. (NASDAQ:ARTC) makes tissue disappear with a wave of a wand. The company's proprietary Coblation technology uses radio frequency energy to remove soft tissue from the body. Its Arthroscopic Surgery System lets surgeons use specialized wands to focus the energy and minimize damage to nearby healthy tissue, simultaneously sealing small, bleeding vessels. First used in arthroscopic procedures to repair joints, the electrosurgery system product line now includes equipment used in ear, nose, and throat procedures; spinal and neurological surgery; cardiology and gynecology; and cosmetic surgery.

Arthocare's earnings are pushing this stock upward. In 2004, earnings per share were 61 cents on revenues of $154 million. This year, analysts expect EPS of $1.45 on revenues of $315 million (note earnings are growing faster than revenues). Next year, they predict $1.95.

But earnings haven't been on a straight upward path, and neither has the stock. In 2000, EPS were 50 cents a share, then in 2001, 43 cents. The next year, they hit 18 cents. Not a good trend. The stock went from $79 (price is split adjusted for a 2 for 1 split in 2000) to a low of $8.60 at the beginning of 2003. Then the bounce started. EPS jumped to 34 cents in 2004, followed by 89 cents in 2005, and then hit $1.14 in 2006. The stock went from its low to the current level of $56.

Can it continue? There are good reasons to think so. In the quarter ended in June, eps increased by 32% over the same quarter last year with revenue growth of 20%. Those numbers didn't happen by accident. The company has been launching new products, manufacturing higher volumes of new products for better efficiency, and increased focus on sales and marketing. Notable growth came from its Spine and Sports Medicine division with Sports medicine increasing sales by 13% compared to a year ago which was 61% of total product sales. Spine sales were up 72% and were 14% of total volume. Look for more growth in Sports Medicine as the company's new rotator cuff repair product has seen increased manufacturing to meet demand.

All of this good news hasn't gone unnoticed. The stock is up 30% since June. Investors have better confidence in management delivering on these new products and continued success.

Other reasons investors like the stock: There's no debt on the balance sheet. Net profit margin is 12.7% this year with expectations of 18% next year. Cash on hand is $41 million with current assets more than 4 times current liabilities. Officers and directors own 5.2% of the stock. Two major institutions own 20.9%. Return on equity is 12% this year, forecast to hit 17% next year and in 5 years, analysts are predicting 29%.

Arthrocare Corp. is hot. Its products are well received. Efficiencies are showing up from higher volumes. Sales are ramping nicely with earnings growing even faster. But investors already know all this and like what they see. If this stock takes a breather, it's well worth taking a deeper look at it.