Zynex Medical: Rapidly Growing Smallcap

Zynex Medical (ZYNX.OB) makes electrotherapy products for the treatment of pain, post-stroke rehabilitation, and spinal cord injury rehabilitation. The company’s products have been cleared with the FDA and are commercially available. The stock has 29,104,119 shares outstanding and close at $1.53 on Friday for a market cap of $44.5 million.

There is a lot of good news with this company and a little bad news. I present the bad news first to get the caveats out of the way, then it's on with the good news.

The Bad News: Problems With Diluted Shares Outstanding

There are some things to be wary about on ZYNX, such as the steady increase in the number of diluted shares outstanding. In each of the last 5 quarters the company’s total diluted shares has increased at an accelerating pace, as shown in the table below. On Friday the 15^th, the company filed a prospectus so warrant holders can sell up to another 2,273,006 shares of stock, increasing the number of diluted shares yet again. This will bring the new number of diluted shares to 29,104,119, and 8.5% increase in shares. The company will not get any proceeds from the sale of stock, but they will receive money, up to $886,472, from the exercise of the warrants.

Another problem is the dilutive effect this selling has on liquidity. Zynex typically trades around 50,000 shares a day, so this is an offering that is about 45 times the company’s average daily volume. This kind of offering will increase the liquidity of the market, thereby increasing the exposure of Zynex. It also creates more supply, so it will take more investors to drive the price up in the future.

Not only do all these extra shares decrease the appeal on the market from the supply side, they also decrease the company’s appeal on the demand side. Zynex has to grow EPS at a greater rate than the increase in diluted shares. Over the past 4 quarters the company has had to grow earnings at rates of 8%, 13%, 20%, and 21% respectively just to have the same EPS as last year, due to the increase in shares. One has to hope the company continues to grow earnings faster than the issuance of shares, otherwise the number of people wanting to hold the stock will decline out of the resulting decline in EPS growth.

One balancing factor to the increase in shares is the large stake held by the CEO. The CEO will still hold a 68% stake in Zynex even after these news shares become available. No other officers hold a meaningful stake in the company, nor or there any other holders which have big enough stakes to claim in an SEC filing, except for those warrant holders selling their shares.

The Good News: Rapid Growth

Overall for Zynex, the good news outweighs the bad news. The company has had rapid growth in orders, sales, and income over the past 6 quarters. This first table shows the rapid increase in orders, year over year and quarter over quarter for the past 13 months. The company typically announces the previous month’s orders total in the first week or so of the month. This is a good way to keep track of Zynex’s fundamental health on a monthly basis.

Orders are zooming ahead, fueling increases in sales and net income. The following table highlights the 5 quarters of accelerating sales growth for the company.

As one can see, trailing 9 month earnings are $0.04 per share. If one extrapolates some earnings growth of similar proportions for the fourth quarter, one could assume fourth quarter earnings of around $1 million. Divide that by the roughly 26 million shares at the end of the fourth quarter and this creates fourth quarters EPS numbers of approximately $0.04 per share, or $0.08 on the year. At 20 times trailing earnings the company would be conservatively valued at $1.60 per share. If the company would simply double earnings in the next year, which could be achievable, the company is easily valued at much more than its current market cap. Assuming $4.5 million in earnings, divided by 35 million shares (a little under 20% diluted share growth from current levels), one could see EPS of $0.13 on a conservative basis. At 20 times forward earnings of $0.13, the company is fairly valued at $2.60 per share, 70% above Friday’s close.

The company’s balance sheet is fairly clean. There is not a lot of cash on hand, but accounts receivable exceeds current liabilities, so there is ample room for operation. Long term debt is less than $200,000 and not a real worry for the company. Interest expense has been negligible on the company’s net income. The company is generating cash from operations and there is no big worries from a cash flow perspective.

The Chart

The stock broke out of a base this last week on good volume. After breaking out, the stock has sat right on top of the base as volume has declined. The stock may not have a large run until 4^th quarter and year end earnings are out. Zynex has a habit of not filing earnings on time and has routinely filed an extension to file with the SEC. This can make investors nervous as the uncertainty mounts. However, the stock is technically a buy in the short-term, if it hits the 10 day moving average while staying out of the base (essentially not closing below $1.48 or that general area). One could easily buy the stock and set a tight mental stop in the $1.42-1.45 area.

In the long-term, Zynex Medical looks like a solid growth company. With rapidly increasing sales, a low forward PE, and no long-term debt to show on the balance sheet, one could expect a several hundred percent increase in the price of shares in a few short years.

Disclosure: I have owned this stock three times in the past and struck out on the last three attempts to run to new highs. I currently do not own shares but would buy shares if I had cash available.

Comments

[mandiga:]

From chart reading it is Heading down!

2008 Feb 18 07:38 AM

[oceandude:]

You've sold it 3 times and now you have no cash?

Actually being without cash in this market/economy is scary enough.

2008 Feb 18 11:13 AM

[Daniel Serm...:]

My largest holding is TCCO, which I bought in the 5.75-6.30 range. I'm also in BRK.B at $4450, PCAP and various prices for a year and a half now, PYTO and NTRZ. I hold NTRZ and PYTO at a loss.

2008 Feb 18 02:23 PM

[OMD:]

I'd be very concerned that the company did 4.9M in revenue through the end of Q3 and the balance of uncollectible receivables went from $1.3M to $3.6M. At the same time, overall receivables ballooned from $1.3M to $3.1M. I'm not sure how much cash they're actually generating.

2008 Mar 26 02:16 PM

[max petrisek:]

The past months were strong growth in top & bottom line. The volume and price per share are zooming up the past month. 95% ot the dozens of matrix are very favorable. The price is now 3.3 or a double the past month. so the pessimists on this stock seem to be wrong. Chacing a momo stock is risky but I'll buy at this price.

2008 Jul 20 06:18 PM