OK, but understand that I'm doing this real quick. Ignore any mispells, etc. a) this is all "off the cuff" and b)this is only MY OPINION!!!!!!!!!!!!
Point #1: I don't think that it is reasonable to expect 1 procedure a week. If a hopital asks for a placement they surely expect to use it. Various notes etc.. that I have lead me to expect more than that. But, as a concession, I am willing to work with 2 per week for the time being.
Point #2: I've never seen a hospital closed for the holidays. Remember, we are talking averages here. This isn't exactly elective surgery, OK?
Point # 3: The 30% I alluded to already had SG&A and so forth taken out. What company in their right mind would price a product like this at 30% gross margins. There is too much R&D and spent capital to recouped. If the market for this product was 30% gross margins, management and shareholders alike would be idiots to allocate the amount of resources that they did to this problem. I believe this is called "capitalism".
Point #4 Your assumption for taxes was high if you are assuming that SG&A etc. would be taken out AFTER figuring Cost of goods sold @ 70%.
GO FIGURE II:
18 mos. out (ie. 12/99) -
Avg. weekly procedures: 2
Number of weeks in a year: 52 (last time I checked)
Number of centers: .15 * 900 = 135
Rev. per procedure: 3500
PRETAX MARGIN: 30%
Tax rate (if they had to pay 30-35%): 33%
Expected 3 year eps growth rate: 50 - 100%
Implied Multiple on taxable eps: 50+
2 procedures X 52 X 135 centers X $3500 = $49,140,000
$49,140,000 X 30% = $14, 742,000 / 20,000,000 shares =
pre-tax e.p.s. of .74 X 40 mult. = $29.48
And to compare apples to apples:
$14,742,000 less 33% taxes = $10,319,400 / 20,000,000 shares =
taxable e.p.s. of .52 X 50 mult. = $25.80
GO FIGURE III:
30 mos. out (ie. 12/2000) -
Avg. weekly procedures: 3 (if you believe in the technology you have to believe this will increase over the previous year)
Number of weeks in a year: 52 (I checked again to be sure)
Number of centers: .25 * 900 = 225
Rev. per procedure: 3500
PRETAX MARGIN: 30%
Tax rate (still questionable): 33%
Expected 3 year eps growth rate: 50 - 100%
Implied Multiple on taxable eps: 50+
3 procedures X 52 X 225 centers X $3500 = $122,850,000
$122,850,000 X 30% = $36,855,000 / 20,000,000 shares =
e.p.s. of 1.84 X 40 mult. = $73.71
And to compare apples to apples:
36,855,000 less 33% taxes = $25,798,500 / 20,000,000 shares =
e.p.s. of 1.29 X 50 mult. = $64.50
GO FIGURE IV:
Since we know that FV = PV(1+i) to the "n"th, and if we are willing to say that "i" is a return of, say, 33%, then we can say:
FV = FUTURE VALUE AS DEFFINED ABOVE = $64.50
PV = TO REMAIN UNDEFINED
i = 33% AS DEFINED ABOVE
FV = PV * (1.33) * (1.33) when "n" = 2 years.
As follows:
$64.50 = PV(1.33*1.33)
$64.50 = PV * 1.77
$64.50 / 1.77 = PV
$36.44 = PV
If my math is correct, and you are willing to say that in 30 months (or 2.5 years) that the stock will be trading for $64.50 and you want a 33% annualized return, then you would be willing to pay up $36.50 for the stock. Also, if you are willing to accept the $64.50, then at $18.00, the implied annualized return is 89%.
OK, I admit I got a little long winded, but it is important that I show the basis of my valuations, or else it is just so much hot air.
Don't forget, I can almost promise that there are errors in here somewhere, I did it on the run. But I think it's pretty close.
Caveat is all is just my opinion!
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