Medicating Your Portfolio With Medical Device Companies: Part 2

Includes: EW, ICUI
by: JoeNatural

In "Part 2," we'll dive right into a second randomly selected (and final) basket of medical device makers in a fun exercise to determine my probability of finding a pleasant surprise or two. My analysis over a month ago in "Part 1" has been pretty spot on, but then again, five weeks isn't long enough to claim victory.

Edwards Lifesciences Corporation (NYSE:EW) is the global leader in the science of heart valves and hemodynamic monitoring that just lowered Q3 revenue guidance early last week from $465-$485 million down to $448 million due to European austerity measures and thus resulting in the stock plunging 22% on heavy volume:

EW 1 Year Chart

With the company stating it expects a strong rebound in Q4, especially if they get FDA approval early in the quarter to treat high-risk patients with SAPIEN, investors may want to hang in there and not panic. Why ? There are twenty three analysts covering this stock and their average EPS growth forecast for next year is 28%, from $2.58 to $3.30 and for a company with a $10 billion market cap, that's amazing growth. Obviously when a high growth stock stumbles, the stock pays a price, but for those watching curiously on the sidelines who missed the meteoric mid-year rise from $70.00 to $107.00, this week's steep correction could offer the chance to finally step in on the company's positive Q4 outlook and beyond. It also doesn't hurt that analysts quickly stepped in here and here to defend the stock after the 22% haircut.

Bio-AMD, Inc. (OTCPK:BIAD) is a tiny development stage company that I recently stumbled across while looking for names that are not widely followed. It focuses on developing hand held electronic diagnostic devices and two in particular, the Digital Strip Reader and the Blood Coagulation Monitor.

Although speculative, the stock looks potentially very attractive and here's why. Bio-AMD's patented DSR has a wide range of applications and initially the company is concentrating on commercialization of its next generation "over the counter" pregnancy testing that offers greater sensitivity and accuracy, thus attempting to give Church & Dwight's (NYSE:CHD) top selling "First Response" a run for its money.

Bio-AMD's COAG technology offers a state of the art blood coagulation meter for the millions of cardiac patients world wide that must take anticoagulants such as Warfarin and Coumadin. The most compelling part of the story is that back on September 10th, the company stated it was in talks with prospective partners for manufacturing and distribution. In a recent phone interview with the company's CEO, Thomas Barr confidently stated the company had more than $3 million in cash and no debt, not to mention a miniscule cash burn that could carry the company for years even without a deal as evidenced in the company's latest 10Q. I also learned there were some significant shareholders from Spain that have been selling their stock, most likely due to deteriorating conditions in Spain and that can be evidenced right here. That said, there appears to be plenty of believers willing to soak up the selling, especially with a partnership deal that's likely just around the corner. With a current market cap of $3 million dollars, this is a stock I want to watch like a hawk, not only knowing a partnership might be close at hand, but also the fact that the company's outstanding share count remains the same quarter after quarter. That's almost unheard of for an OTC stock.

I noticed this morning that the famous short-seller GeoInvesting is out with a brief note on BIAD, stating that the stock could have legs if the talked about partnership materializes. It's unusual for Geo to mention companies this small, so I'll take that as meaning more and more eyes are on developments here.

ICU Medical, Inc. (NASDAQ:ICUI) develops and manufactures medical devices used in infusion therapy, oncology and critical care applications. Their product line includes needlefree vascular access devices, custom infusion sets, closed system hazardous drug handling devices and systems, advanced sensor catheters, needlefree closed blood sampling systems, and innovative hemodynamic monitoring systems.

The company's one-year chart is a thing of beauty -

ICUI 1 Year Chart

- and it consistently beats earnings estimates quarter after quarter. Monday afternoon after hours, ICU released their Q3 report and in reporting EPS of .82, they easily crushed estimates of .68, although revenue met expectations of $81 million. International sales increased by only 1.7% year over year. In the report, management lowered 2012 revenue guidance from $318-$325 million to $315-$318 million, but at the same time, they boosted full-year EPS estimates from $2.55-$2.70 to $2.75-$2.80, as margins have risen significantly due to a strong product mix along with more favorable peso exchange rates.

Personally, I think the stock will make a pit stop and take a breather from its torrid pace upward, as the company's trailing P/E is 22 after Monday and the industry average is 19, not to mention Monday's warning on full-year revenue could be the signal to take profits off the table along with analysts' projected EPS growth of slightly over 10% next year. As efficient as the company has been with cost-cutting, there comes a point when that ceases. Even with 16% of the float being short, I don't see cause for a possible squeeze and short-sellers might have just been given a chance to finally see trading work more in their favor. That said, the company has over $200 million in cash and no debt, thus any possible accretive acquisition(s) could send shorts packing once and for all. Shareholders should keep a close eye on the stock, as to me it seems like it's reached an inflection point.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.