i'm not in, simply been following this stock for a bit. discovered it while digging into the portfolio holdings of the firsthand tech value fund (nee interactive investments); they had a large position some time ago, but have since pared it back. thought the board might be interested in this smartmoney piece.
fwiw,
-chris.
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August 4, 1998
THE HEART OF THE MATTER
DAILY SCREEN
ARTERIAL VASCULAR ENGINEERING
IT'S NOT OFTEN that a stock that runs up more than 100% in 12 months can be labeled undervalued. But that seems to be the case with Arterial Vascular Engineering (AVEI), a maker of the small metal devices known as stents, used in coronary procedures.
Despite the year's stock price double, AVEI trades at a bargain-basement price-to-earnings ratio of 16 times fiscal (June) 1999 estimates. That's due in large part to the constant upward earnings revisions that analysts have bestowed upon this company. In the past four weeks alone, the 16 analysts covering AVEI have raised their 1999 and 2000 estimates by 11%.
The Street's enthusiasm helped push Arterial Vascular through this week's SmartMoney Earnings Revision Screen, where, for the first time in several weeks, our profiled company found a crowd. Seventeen companies made the list, including four financial services companies, a couple of tech issues and seven health care concerns. The health care slant is not surprising, given the heat emanating from the sector during the recent past. And with some pundits suggesting that the market is teetering on the brink of a correction, the bear-market proof sector seems like a good place to be.
Arterial Vascular stands out in the crowd for two reasons: its attractive valuation and its commitment to growth in a hot sector. First, the growth: The company's top line has jumped from $2.9 million in 1994, to $79 million in fiscal 1997 -- AVEI's first year as a public company -- to $388 million this year. Now, some analysts are estimating that the company could reach $1 billion by 2000.
The surge has come thanks to a combination of internal development efforts and, more recently, acquisitions. Just last month, Arterial Vascular announced that it had acquired C.R. Bard's (BCR) coronary catheter laboratory business for $550 million. The move was widely cheered by analysts, who had been waiting to see how the company, which has derived nearly all of its revenue from its coronary stents, would diversify its product line without diluting earnings. Not only is Bard digestible, but its angioplasty balloon products are considered key to Arterial Vascular's efforts to keep up with its larger competitors, Guidant (GDT) and Boston Scientific (BSX).
"This is the best opportunity I've seen in some time [for Arterial Vascular] to turn itself into a major cardiovascular company," says Greg Simpson of A.G. Edwards.
The leap from one-trick pony to one-stop coronary shop couldn't be timed better. Boston Scientific's new Nir stent is rumored to be days away from approval and is expected to take a chunk out of AVEI's dominant market share. In addition, analysts expect the booming growth of the $1.4 billion coronary stent market to slow precipitously in the coming years.
"We really see the [coronary] stent market eventually contracting," says Sharon di Stefano, a Wall Street Journal All-Star analyst at Josephthal & Co. "Within three years, we will see growth slow to 5% to 7%." That's a huge drop-off from the 70% rate that di Stefano calculates for 1998.
Still, Arterial Vascular should hold its ground in coronary stents, sharing the market in equal proportions with Guidant and Boston Scientific. "When Boston Scientific's Nir stent gets approved, a lot of the cardiologists will try it. But when all's said and done, I think you're looking at a three-way split," predicts Simpson. And as the Bard acquisition suggests, the company is willing to spend its ample cash to add new revenue streams to the mix.
Analysts believe that the strategy should pay off in the marketplace and the market. Not only will hospitals be more attracted to the company's broader product line, but investors will consider AVEI a less risky play. "The stent business is great at driving earnings, but investors hate it because of the uncertainty," says Hambrecht & Quist's Greg Faulkner.
Indeed, AVEI shares got an 8.4% boost on the Bard acquisition news, suggesting that in this field, broader is better. "I think they could acquire their way to a higher multiple," says Simpson.
The valuations of the company's more diversified competitors also suggest there is ample room to run. Boston Scientific and Guidant sport lofty multiples of 40 and 30 times forward earnings estimates, respectively. And while Arterial Vascular is still the infant of the group, it has fared well against its larger foes. "I think they've already proven they can go toe to toe with Boston Scientific and Guidant," says Simpson.
The company clearly has some hurdles to overcome as it matures, not the least of which are the lofty expectations its early success has created. But despite the specter of a slowdown in its core stent business, analysts are bullish enough on the company's future to forecast earnings increases of 47% in 1999 and 17% in 2000. And if the market comes to value the company anywhere near its peers, the stock price should see an appreciable boost as well.
-- By Joshua Albertson
smartmoney.com |
