The U.S. medical device market alone was worth an estimated $127.1 billion in 2013, with per capita spending of $399 on such devices, according to Espicom Business Intelligence. With companies like Medtronic Inc. (NYSE: MDT) and Baxter International Inc. (NYSE: BAX) outperforming the S&P 500 over the past 52-weeks, investors seem to believe that this outperformance will continue for the foreseeable future as shares surge higher.
But, investors that are looking for value rather than growth may want to take a look at AmbiCom Holdings Inc. (OTCQB: ABHI) - a manufacturer of original equipment manufacturer ("OEM") wireless modules for the global medical device industry. Since 2007, the company has sold more than a million wireless modules to companies ranging from Cardinal Health Inc. (NYSE: CAH) to Siemens AG (NYSE: SI) for use in medical devices and other end markets.
In this article, we'll take a look at why the medical device industry represents an attractive market and how AmbiCom Holdings is well positioned to deliver strong value for shareholders.
High-Growth, Attractive End Market
The global medical device industry is projected to reach $302 billion in size by 2017, with a compounded annual growth rate ("CAGR") of 6.1% between 2011 and 2017, according to Research and Markets. The industry's growth is being driven by a combination of new technologies - like surgical robots, nanotechnology, and wireless technologies - amplified by the expansion of new hospitals and clinics as a result of urbanization around the world.
Medical devices also tend to be high margin products for two reasons. First, the products are regulated by the U.S. Food and Drug Administration ("FDA"), which limits competition for several years when new devices hit the market. And second, the products are less price sensitive given the fact that insurance companies cover the costs. According to some sources, the margins on medical devices are better than consumer electronics and even illicit drugs.
Figure 1 below compares Medtronic's and Johnson & Johnson's (NYSE: JNJ) gross margins to non-medial device stocks like Apple Inc. (NASDAQ: AAPL) and General Electric Inc. (NYSE: GE) - in that order. This data suggests that medical device makers have realized significantly higher gross margins over a long period of time relative to the general market. As a result, the stocks tend to have higher price-earnings multiples and can more easily scale bottom-line results.
Realizing Stable, High-Margin Revenue
AmbiCom Holdings benefits from these trends as a provider of OEM wireless modules to medical device markets. During the nine-month period ended April 30, 2013, the company's revenues rose 119%, from $1,065,801 to $2,331,492, with gross margins of 54%. Net income came in at $387,540, or $0.022 per diluted share, with 17,678,670 diluted shares outstanding, according to the company's latest 10-Q filing with the SEC.
These revenues came from a combination of wireless device sales and non-recurring engineering project fees, with increasing customer demand for its newly introduced cards and other products. Since many of its products are included in medical devices, and the FDA must approve any changes to these devices, the company's revenues tend to be long-term and stable in nature compared to the sale of OEM devices to other non-medical markets.
Recently, AmbiCom has announced a number of medical device contracts:
- December 2012 - AmbiCom Holdings received an $180,000 order for their wireless CompactFlash cards to be used in patient monitoring systems in Germany.
- January 2013 - AmbiCom Holdings received a $200,000 order for wireless communication devices for use in defibrillators.
- March 2013 - AmbiCom Holdings received a $380,000 order for WL54-CF CompactFlash devices for use in glucose meter products.
- March 2013 - AmbiCom Holdings received an additional $1.2 million order from the aforementioned glucose meter company.
Notably, two of the customers mentioned in the four contracts above are repeat customers that have worked with the company for many years. In addition to recurring revenue from per-device sales, the company benefits from repeat customers due to its high quality of service and innovation that it offers relative to its industry peers.
Potential Investment Opportunity
AmbiCom Holdings could represent an attractive investment opportunity. With a market capitalization of around $1 million, investors have the chance to acquire a profitable and growing company at around 1x price-to-earnings and less than 1x price-to-sales. Management's focus on expanding its footprint in the medical device industry should help propel these results, while its existing revenues should prove to be very stable.
In addition to medical device manufacturing, the company has expanded its focus to developing its own proprietary ionic toothbrush that it plans to launch next year. The Soladey Ionic Toothbrush J3X marks management's foray into developing its own products targeting very large consumer end markets. For instance, CompaniesAndMarkets expects the U.S. oral hygiene market to reach $6.2 billion in size by 2017, with electric toothbrushes playing a big role.
In the end, AmbiCom Holdings represents a compelling opportunity for investors to buy into a low-risk micro-cap stock that's well positioned in the medical device space. With profitable operations, growing revenues, and high margins, the company should see its earnings multiple and share price expand over time, if the performance continues.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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