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  • Electromed: It's Always Darkest Before The Dawn 3 comments
    Feb 25, 2013 8:19 PM | about stocks: ELMD

    Everyone knows that actions speak louder than words. At insider-alerts.com we watch those actions daily (with the assistance of a custom developed system) and interpret them to give us an advantage in finding companies to invest in, or stay away from. When the insiders paint a picture that shows the market is missing something important, we act on it. We fully reject the Efficient Market Hypothesis. We've found frequently enough, even after an insider makes a telling purchase or sale that there is pricing inefficiency in the markets. We act to capitalize on those situations.


    You just have to take a quick glance at the stock chart of Electromed (NYSEMKT:ELMD) to see that it's had a rough time over the past two years. The company has had its difficulties through the recession and there's no sign that things have turned the corner yet.

    (click to enlarge)

    However, there comes a time when you see actions taking place and it becomes clear that the changes implemented will lead to a rebound. The investor's job is to figure out when is the appropriate time to jump in. Do you want to make your move when you see the changes taking place before the rest of the crowd realizes? Or do you want to wait until you see numbers posted that confirm the changes are having the desired effect, and the stock possibly already on the move higher?


    Our approach with Electromed was simple. We didn't look extremely deeply into the numbers, simply that they weren't losing money hand over fist, and that the balance sheet remained healthy. What caught our attention was (as always) the insider purchasing, along with key personnel changes.

    As far as the business - Electromed produces the SmartVest airway clearance system. It's a real product, it has a real customer base, and it generates real sales and profits. If you have interest, you can jump over to smartvest.com and read all about it.

    We leveraged the research which was done for us at no cost by Zacks Investment Research Senior Medical Device / Diagnostics Analyst Brian Marckx - as he has posted regular updates on Seeking Alpha for some time. If you go and check his prior posts/coverage, even with his last update in May 2012, he had good forward looking estimates and stock price targets out to 2015. Below I've provided Brian's May 2011 Valuation and Recommendation followed by his May 2012 statement, afterwhich coverage stopped (at least as far as being posted to Seeking Alpha).

    May 2011

    Valuation and Recommendation

    We are raising our price target on ELMD due to a combination of moving our 2011 EPS estimate from $0.13 prior to Q3 results to $0.15 currently and comparable valuations moving higher since our last update. We are also moving our investment recommendation from Hold to Outperform due to the discrepancy between ELMD's current share price ($3.51) and our new target ($5.50).

    We continue to value Electromed using Hill-Rom's (NYSE:HRC) long-term PE/G ratio as a comparable. Hill-Rom's long-term PE/G currently sits at 1.64 (up from 1.32 since our last update on ELMD). We model ELMD to post EPS of $0.34 in 2014, implying four-year CAGR of 22.4%. Backing this growth rate into the 1.64 PE/G results in a near-term P/E multiple of 37x. We look for ELMD to earn $0.15/share in fiscal 2011 which values the company at approximately $5.50 per share.

    May 2012

    Valuation and Recommendation

    We now look for EPS of approximately $0.09 (excluding expected severance expenses in Q4) in fiscal 2012, down from $0.12 prior to Q3 results. EPS in our out-years have moved from $0.25 to $0.21 in 2013, $0.33 to $0.30 in 2014, and $0.41 to $0.38 in 2015.

    We continue to value Electromed using Hill-Rom's (HRC) long-term PE/G ratio as a comparable. Hill-Rom's long-term PE/G currently sits at 1.31. We model ELMD to post EPS of $0.38 in 2015, implying a four-year CAGR of 31%. Based on a 1.31 PE/G, ELMD should trade at about 41x 2012 EPS - or ~ $3.70/share. We are moving our price target from $4.00/share to $3.70. The stock currently trades at about $2.50. We are maintaining our Outperform rating.

    So, Zacks did all the research, things turned South, we have the stock price decimated, and Zacks disappeared. The company has been left for dead by both Zacks and investors.

    Our view is that Electromed is extremely small, the EPS numbers used as the basis for the Zacks estimates are miniscule, and going forward with even minimal profitability the company will easily eclipse these estimates. Assuming the company rights itself and gets back on a path to growth (which we believe will happen), the share price will go significantly higher than the $1.40/share where it sits today and likely above the price targets Zacks previously indicated.


    As for the personnel changes mentioned earlier, there have been two high-level additions. We have Kathleen Skarvan who was named CEO in November and Carlo Micheletti who was named General Manager of Electromed's international business just a few weeks ago. Both of these folks have extensive industry experience and are expected to help Electromed get back on track with increased sales and margins going forward.

    Now, on to the insider stock purchases...

    Our system shows the following insider purchases since January 2012:

    WhoDateSharesPriceShares Owned
    SKARVAN KATHLEEN02/21/20131,450$1.3523,950
    SKARVAN KATHLEEN02/20/20134,600$1.3522,500
    SKARVAN KATHLEEN02/15/20132,900$1.3517,900
    CRANEY STEPHEN H.12/14/20126,600$1.50315,730
    SKARVAN KATHLEEN12/14/20128,000$1.4715,000
    CRANEY STEPHEN H.12/13/201212,200$1.49309,130
    CRANEY STEPHEN H.12/12/20121,200$1.39296,930
    SKARVAN KATHLEEN12/11/20127,000$1.417,000
    ECKLES WILLIAM11/15/20129,311$1.5685,311
    KLOECKNER DARREL L05/21/20129,375$2.6550,000
    ECKLES WILLIAM05/16/201210,000$2.5276,000
    CRANEY STEPHEN H.03/12/20126,931$3.00295,730
    CRANEY STEPHEN H.03/08/20121,520$3.00288,799
    CRANEY STEPHEN H.03/07/20122,300$3.00287,279
    CRANEY STEPHEN H.03/05/2012395$3.00284,979
    CRANEY STEPHEN H.03/02/2012100$3.00284,584
    CRANEY STEPHEN H.03/01/201210,150$2.93284,484
    HAGEDORN THOMAS M.02/22/201210,000$3.01874,250
    ECKLES WILLIAM02/15/20123,300$3.104,300
    ECKLES WILLIAM02/15/2012200$3.044,500

    Kathleen Skarvan = CEO, Stephen Craney = Director, William Eckles = Director, Darrel Kloeckner = Director, Thomas Hagedorn = Director

    In addition to the insider purchases over the past year indicated above, insiders hold over 40% of the outstanding shares. So, of the roughly 8.1 million shares outstanding, there's only about 5 million in the float.


    In general, we've seen the shares of most companies bottom during December with the year end tax selling. However, for Electromed, shares continued moving lower as the earnings announcement two weeks ago were not impressive with a minor loss announced.

    With the key personnel changes, we believe that we've hit bottom as far as the company performance goes. Maybe we'll see one more quarter of weakness, but we expect the back half of 2013 to be stronger as we see the results of new business plans and strategies being put into place now.

    CEO Kathleen Skarvan commented in the earnings announcement:

    While our results this quarter are disappointing, we are gaining momentum and positioning ourselves for sales growth going into fiscal year 2014. Our positive momentum is attributable to our re-branding strategy, hiring a veteran International sales manager focused on broadening our footprint in Latin America and the Middle East, our U.S. sales force being fully staffed in all strategic regions and realigning our reimbursement function to create a stronger focus on payer contracts and greater efficiencies. Additionally, it is important to highlight the strength of our balance sheet, which is strong enough to support us while we work through our current challenges.

    We've been impressed by what Ms. Skarvan has stated since taking the CEO position in November, as well as the push to expand international sales. Based on her own willingness to purchase shares since coming onboard, we're willing to give her lots of latitude as it's clear that her priorities to increase sales and margins are well aligned with increasing shareholder value - for all shareholders.


    As mentioned above, Electromed has about 8.1 million shares outstanding with average daily trading volume at an extremely thin 5,000 shares. As a result, being very thinly traded, the bid/ask spread can be 5 cents or 10 cents at times. This is quite large for a stock trading at under $1.50/share. Anyone who considers purchasing or selling the stock should do themselves a favor, and before trading, review how the stock trades on a day to day basis, always place a limit order, and even go so far as considering buying/selling in small batches and/or utilizing All or None (AON) on your orders.


    In general, we believe in never buying your entire position all at one time. Buy a half, a third, or a quarter of what you really ultimately want. If the price goes lower and the investment thesis still holds, then buy more. In most cases, based on what we look at when deciding on an investment, the probability is that we aren't catching the stock at the absolute bottom where it's immediately going to take off after we buy. That being the case, we've learned to never take a full position with the initial purchase. No matter how low the price, it can always go lower. So, instead of possibly being unhappy about a losing position right after purchasing, it becomes an opportunity for continued close monitoring and getting in to your desired position at a lower cost.


    Insider-Alerts does not make any buy or sell recommendations with respect to the stock or companies we write about. The reader accepts full liability and responsibility for acting on information we provide and any losses which may result.

    Insider-Alerts does not receive any compensation whatsoever for the articles we write and research we publish. We have no relationship of any kind with either the companies we report on, or the forum which we provide our research.

    Insider-Alerts may hold positions in the securities of the companies we write about, and if so, that position is disclosed.

    Insider-Alerts provides a free daily report of the top insider trades and is available via the Subscribe link on our homepage at insider-alerts.com

    Disclosure: I am long ELMD.

    Additional disclosure: We intend to buy more on any further share price weakness.

    Themes: Insider Ownership, Long Ideas Stocks: ELMD
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Comments (3)
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  • Insider-Alerts
    , contributor
    Comments (620) | Send Message
     
    Author’s reply » A quick follow-up.

     

    A Form 4 filing was made by Director Stephen Craney today for his purchase of 50,000 shares yesterday at $1.40/share. This accounted for almost all of the shares traded yesterday. Adding this to the shares shown in the table above, he now owns 365,730 shares.

     

    http://1.usa.gov/XZaefq
    26 Feb 2013, 06:30 PM Reply Like
  • Insider-Alerts
    , contributor
    Comments (620) | Send Message
     
    Author’s reply » Over the past two days, ELMD shares have shot up over 200% on over 7.5 million shares volume. The volume is about 150% of the entire float and more shares than have traded since the company IPO'd. Understand normal daily volume is under 10,000 shares.

     

    What sparked this rally is an announcement by the company yesterday that the FDA has given market clearance to the SmartVest SQL which is the newest version of the SmartVest. SQL = Smaller + Quieter + Lighter.

     

    The FDA approval is a good thing and allows ELMD to begin selling their next generation product. However, the shares have gotten well ahead of themselves and we believe that the enormous trading volume is a result of pumping - we've seen posts indicating that NIA is responsible.

     

    At this time, we recommend investors take money off the table as the shares are currently overvalued from a fundamental perspective. Nothing has really changed over the past two days, the company is still slowly moving to turn things around and get back to profitability. However, the company is not profitable today, and still faces headwinds.

     

    If you bought shares when this article was originally posted 10 months ago, you are up $2/share over the $1.40 purchase price. Since this article was posted, the shares have spent the bulk of the time between $1.00 and $1.20 having been at $1.00 just two days ago. When considering the current situation, we'd recommend selling half the original shares, and letting the other half ride. In doing so, you'll bank a nice profit and be able to play with the remaining half of the shares totally free.
    31 Dec 2013, 04:54 PM Reply Like
  • Insider-Alerts
    , contributor
    Comments (620) | Send Message
     
    Author’s reply » Just under four weeks later and ELMD shares are almost 50% off the high seen on Dec 31. Hopefully ELMD investors took gains as previously suggested.
    26 Jan, 10:43 AM Reply Like
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