Kinetic Concepts - KCI

The Idea I've been watching KCI since it went public in March of '04. Today, KCI trades almost at the same price that the first shares traded - $33. The company offers medical-tech devices for wound-care. You can go to KCI's website to learn more about its products. I am discussing it today because the stock came up again in a screen - since it trades at 13x next year's earnings estimates.

I hope I never, ever need one of their devices (knocking knuckles on my wooden desk...). But, many people do, and the market seems to have potential.

There is another competitor in this space, called Blue Sky Medical. There is a patent war going on between the two, and BlueSky won a ruling on the 27th in favor, but KCI still maintains that Blue Sky is cheatin'!

Financials In it's last earnings report, KCI beat EPS estimates by 3 cents (64 vs. 61). But, they missed their revenue target. Why might this be? It appears that margins have been trending up. We all like that...and the gross margin is nearly 50%, which means I'd like to be in that business! The company is profitable and solvent - (the "Times Interest Earned" is 11.2 - meaning they can pay their debt. And they have alot of debt. But it's not the financials that look poor here.

Conclusion If I were running my hedge fund today - I would be tappin' some of my biomedical engineering, doctor, and lawyer buddies to figure out who's right. It's 2006, and I'm still in school -> so I have no staff. The bigger problem for me is that the company said it only expects to grow 11 to 15 percent this year. Ok, fine...but analysts are still more optimistic. Maybe they haven't yet revised their numbers, so the 13x number from above should be tossed forcefully into the toilet. I'm still seeing about 60% EPS growth on the estimate for '06.

Toss in a little bit of the uncertainty with the patent war, and I say

Flush!

Too much risk for not enough reward. I'll pass on KCI for now.