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A picture’s worth a thousand words, but in the medical and security imaging industries, a picture is worth millions of dollars.

One company happily straddling these two profitable sectors and offering both some of the best imaging technology available is Peabody, Mass.-based Analogic Corp. (Nasdaq:ALOG).

The $930 million market-cap company is a leader in the design, manufacture and sale of high-precision data acquisition, and signal and image-processing-based medical and security systems and subsystems. Think computed tomography [CT] scanners, magnet-resonance imaging (MRI) scanners, digital radiography, ultrasound systems, x-ray detectors and CT-based airport security scanners.

Much of the company’s business is derived from selling its technology through contracts with OEMs, or original equipment manufacturers, such as Siemens AG (NYSE:SI), Phillips and Toshiba on the medical side, and through a security and detection systems unit of L-3 Communications Holdings (NYSE:LLL) on the security end, a seller of end-market machinery to hospitals and airports.

If you were one of those folks who just looks at net income, you would have missed the story that sent Analogic’s stock up almost 10% to its $72.77 June 5 close from its June 4 close, when fiscal 2008 third-quarter results came out.

Even though the bottom line fell slightly in the quarter because of a reduction in interest income, a subsequently higher effective tax rate and a 10% dip in security sales, the company reported 23% year-over-year revenue growth driven by better-than-expected medical product sales and strong sequential growth. Total revenue and net income excluding one-time items were both ahead of analysts’ expectations.

By segment, digital radiography was up 138%, medical imaging products were up 29% and sales of its BK-Medical unit’s ultrasound products rose 17%. The company says it’s expecting a pickup in orders for its high-performance CT scanners among other products that analysts are scrambling to find market values. 

For instance, Stanford Group analyst Josephine Millward noted in a June 6 report that because Analogic recently signed on to produce for three leading digital radiography OEMs, it could be poised to sit on up to 50% of the estimated $125 million market within two to four years.

Another growth prospect for Analogic is its recent $76.9 million acquisition of MRI gradient power amplifier supplier, Copley Controls Corp., which adds to its already dominant market position. The deal, which closed in April, is expected to accrete $83 million in 2008 revenues and bring Analogic’s own amplifier products to new customers from Copley’s existing OEM base and Asian presence.

Even though recent sales for airport baggage security scanners have lagged, the general expectation among analysts and management is that sales should improve going forward because of several factors, not the least of which is that the Transportation Security Administration recently approved an $800 million fiscal 2009 budget for explosive detection systems.

Just recently on June 3, Analogic announced that it received a $6.9 million contract from L-3 (as part of a TSA grant) to finalize its eXaminer XLB screening system for probable initial delivery in the fall of 2009. The system can process up to 1,100 bags per hour and is designed for use in the larger baggage handling systems being set up to accommodate high passenger volumes that come with the Airbus-38 and the Boeing 787 jumbo jets.

Another 3-D image scanner designed for the 410 low-volume airports around the United States is also in the works for 2009. Offutt Securities analyst R. Bentley Offutt estimates the market for this product could be worth around $360 million. What’s more, he says in the next few years, the 600 original eXaminers currently in use will start to reach replacement age and that Analogic could be the favored brand. 

While Analogic seems to be a promising investment, there are a few caveats: for one thing, the company is extremely reliant on government spending. Analogic faces many competitors in the medical arena and can’t predict the nature or timing of TSA purchases, budgets and mandates that can dramatically affect the company.

Another wildcard is management’s strong interest in pursuing other good-fit acquisitions such as Copley that may or may not be immediately accretive. And with $156 million in cash as of April 30, that’s no empty threat.

Millward has Analogic at a “buy” and raised the 12-month price target to $80 per share from $75 on June 6, but notes that the merger integration with Copley has yet to be completed. As of May 16, Offutt had the stock rated “outperform” and the four analysts surveyed by Thomson Financial have a mean price target of $83.75. Shares closed at $68.71 on Monday and the 52-week trading range has been as low as $50 per share and as high as $79.02.  

Analyst price targets would indicate now is the time to buy Analogic. Wherever the stock does head, one thing is for sure: Analogic’s strong market position and stable of exceptional and improving high-tech products certainly make a pretty picture for patient investors.

Disclosure: none

Source: Analogic Corporation: X-ray Visionaries