Savage Capital's  Instablog

Jeffries' Brian Kennedy has gift wrapped BEAT shares with the best entry point investors have seen in months after initiating at Sell last Friday.  This chaps' entire thesis is that reimbursement fees from Highmark will come off ~20% in the coming months, which will put a crimp in overly bullish sell side estimates, ultimately leaving shares falling to 17x Kennedy's 2010 EPS estimate. The stock closed at 20x that figure on Friday, ~18% above the 52 week low and very close to IPO levels.

With all due respect, his thesis utterly irrelevant and even questionable.  This is a prime example of sell side research missing the forest for the trees.  In a very crude sense it is equivalent to an AAPL analyst coming out in 2004 with a Sell rating based on the thought that iPod prices would drop from $400 to $320.  This just in: relatively new products with massively ramping unit volume sales almost always see price erosion.  There is little question that unit volumes will offset remibursement cuts, especially if BEAT is able to expand reimbursement coverage from commercail payors (UNH coming soon to a a cardiologist near you) and continue investments in salesforce.  And, by the way, gross and profit margins are still growing even with said price compression.  Furthermore, Citi's Amit Bhalla is out saying that management had a conversation with Highmark on Apri 14th during which no reference of reibursement cuts was made.  Highmark has historically done a good job of keeping BEAT management in the loop regarding payment decisions.  Bhalla goes on to say that Highmark itself was curious as to where Kennedy had come up with the idea that a reibursement cut is in the offing.

Cardionet is the leader in MCOT (mobile cardiac outpatient technology) with only one competitor (LifeWatch/Card Guard, 20% US MCOT market share).  They have the best arythmia monitoring technology in a $2B+ market which is still growing.  The company is a clear beneficairy of the United State's aging population and there is solid potential growth for various different uses of Cardionet's product (think cell phone capable of monitoring your vitals from literally anywhere, sending information to your doctor).  Even Kennedy, who printed street low estimates, has them posting 38/41% y/y revenue/EPS growth in 09 and 27/76% in 2010.