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OxySure Systems: Undervalued, High Growth Potential

|Includes: OxySure Therapeutics, Inc. (OXYS)

OxySure Systems, Inc. (OTCBB: OXYS) is an innovative medical device manufacturer that invented a device capable of creating medically pure oxygen from two inert dry powders. The FDA-cleared OxySure Model 615 minimizes many of the risks associated with traditional medical oxygen tanks, is easily operated by a lay person, can be conveniently located on-site next to automated defibrillators ("AEDs"), and has already saved thousands of lives.

With more than 3 million AED installations around the world, there is a large initial market for the OxySure Model 615 that remains untapped. However, beyond the "AED companion" market, there is host of medical emergency categories where oxygen is applicable, not just cardiac arrest. In the long run, the company believes that the OxySure Model 615 could be like a fire extinguisher - that exceeds a 100 million unit market. Management has been working diligently to expand its presence in these markets through a number of initiatives, which have resulted in strong triple-digit top-line growth rates. And, while some investors may see a lofty 20x price-sales ratio, ongoing investments in this growth could justify a much higher share price.

Strong Top-line Performance

OxySure reported revenues of $895,413 during the trailing 12-month period, which is 232% higher than its FY 2012 revenues. In its latest 10-Q filing, management attributed this strong performance to an increase in U.S. product sales, an increase in licensing and service revenues, and an increase in products developed for the military as part of a teaming agreement that combined to boost growth 657% in Q2 2013 alone to $476,071.

Management has sustained this growth through a number of initiatives, including a new double wall cabinet to house a combination AED/OxySure system, a number of new distributors in the U.S., andinternational distribution agreements with Medizon B.V. and Aero Healthcare. In fact, the company now sells its products through more than 40 distributors and independent agents in the U.S. and overseas in Australia, New Zealand, the Netherlands, Belgium, Luxembourg, the U.K., Brazil, South Africa, Turkey and numerous other markets.

Figure 1 - OxySure Revenue Estimates - Source: Taglich Brothers

Taglich Brothers analysts expect these developments and ongoing organic growth to drive revenues from nearly $2 million this year to $4.9 million in FY 2015, according to an August 19th research note. Over the long-term, the analyst expects FY 2017 revenues to scale up to $18 million based on the acceptance of the company's Model 615 as a companion to AEDs produced by companies like Johnson & Johnson (NYSE: JNJ) and St. Jude Medical Inc. (NYSE: STJ).

Potential Near-term Profitability

OxySure's total operating expenses grew just 30% TTM compared to its 232% revenue growth over the same timeframe. These dynamics, along with lower interest expense, helped reduce its net loss for the trailing 12-month period to $(646,271) or $(0.03) per share. And while the company's cash burn expanded, a closer look reveals that this was due to an increase in accounts receivables and inventory, as well as additional working capital needed to support its growth.

Taglich Brothers expects the company to break even on both a net income and cash flow basis towards the middle to end of FY 2015. While this may seem a bit into the future, it's worth noting that much of the net loss is due to cost of capital needed to support triple-digit revenue growth. Management could forego these investments in growth and become profitable much sooner, but these higher growth rates could unlock significant margin potential in the stock.

Figure 2 - OxySure Cash Flow Projections - Source: Taglich Brothers

The company also appears significantly undervalued when looking at the potential growth rates from this spending in the near-term, suggesting that the market isn't fully appreciating these investments in its future growth. While the stock trades with a 20x price-sales ratio right now, the discounted value of its future sales indicate that it might be undervalued. For instance, if revenues hit $0.63 per share in FY 2017, the stock could be worth $4.40 with a mere 7x ratio.

Investment Opportunity

Ultimately, OxySure's long-term opportunity lies in the large and growing market for AEDs, with over 2.2 million installed worldwide, primarily in the U.S. and Japan. Capturing just a fraction of this market could equate to significant revenue potential, while there is evidence to suggest that medical oxygen is used and must be replaced more frequently. These replacements add recurring revenue to the company's business model, making it even more attractive long-term.

When quantifying this opportunity, investors may look towards three analysts covering the stock, including Taglich Brothers with a $2.10 price target, Zacks Investment Research with a $1.75 price target, and Sterling Investment Services with a $1.90 price target. Averaging these price targets yields an estimated $1.91 per share 12-month target, which represents a significant 190% premium over the current market price of $0.66 per share.

Additional Resources

  1. Company Website
  2. Recent SEC Filings

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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