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Biotech / Medical : Molecular Dynamics -- Ignore unavailable to you. Want to Upgrade?

To: Vector1 who wrote (97)	1/11/1998 12:04:00 PM
From: Andriy Turhovach	Read Replies (2) \| Respond to of 153

V1 - Here it is MDYN MOLECULAR DYNAMICS INC © 1998 Individual Investor Group Updated (EDT) 16:00 Last Sale $10.00 Net Change -6.00 Day's High $13.13 Day's Low $9.75 Volume (000s) 2,061.50 Bid $9.88 Ask $10.25 52-week High $28.13 52-week Low $10.50 Trailing EPS 0.49 Trailing P/E 20.4 Mkt.Cap (mil) $115.4 MOLECULAR DYNAMICS INC. develops and markets systems that accelerate genetic discovery and analysis. Earnings shortfall preannounced, stock plunges 37%; we think it's overdone; Buy (1/9) This morning MDYN announced that it will miss analysts' estimates in the fourth quarter. The company said that revenues and EPS will be approximately $14.5 to $15 million and $0.12 per share, respectively. This compares to estimates of $16 million in revenues and $0.14 in EPS. The company blamed lower-than-expected sales of scanner products in Japan, inventory reevaluation due to reduced cost of parts for the company's MegaBACE product line, and a shift in revenue mix towards products for which profits are shared with Amersham Pharmacia Biotech. We are as upset about this announcement as our readers. Just on Tuesday, we spoke to CEO Jay Flatley and asked him specifically about the fourth quarter. Mr. Flatley told us that he was comfortable with the aforementioned fourth-quarter estimates and the estimates for 1998. One month ago, when Hambrecht & Quist analyst Robert Olan revised his estimates for the fourth quarter downward by $0.02, from $0.16 to $0.14, we contacted Mr. Flatley and discussed the revision with him and were told that the company was comfortable with $0.14 per share. It is unfortunate that the management of MDYN did not share much of their insights with us both times and as a result, our readers incurred substantial losses on the stock. Although we feel that this lack of guidance from the management is irresponsible and would normally force us to downgrade the company, we do think that the market overreacted to the news and the stock is indeed attractive right now. Here are the reasons behind our current Buy recommendation: Problems in Japan At the beginning of 1997, the company, as well as the investor community, expected 100% revenue growth in Japan. The company gradually reduced its expectations due to a soft Japanese economy and unfavorable currency exchange. According to Mr. Flatley, the company incurred a $375,000 reduction in revenues from currency exchange, and, the stronger dollar made MDYN's product less attractive than its main competitor, Fuji's product and caused reduced sales as a result. We believe that these factors have already been included in analysts' December estimates revision for 1998 of $76 million in revenues and $0.72 in EPS. We also see further deterioration in currency exchange unlikely in 1998. Although H&Q analyst Robert Olan cut his estimates in EPS to $0.56 in 1998, we think it is conservative. Inventory revaluation The company typically reevaluates inventory every six months. In the fourth quarter, due to the reduced cost of parts for the MegaBACE line, the overall value of the company's MegaBACE inventory dropped. But this should not concern investors at all because it is actually good for the company going forward as it can achieve higher margin on MegaBACE product line. Shift in revenue mix The company's strategy is to shift revenues from its traditional scanner products towards MegaBACE and DNA microarray technology. Due to the nature of the business, a new product like MegaBACE typically has a lower margin in the first couple of years. Right now, scanner products have a gross margin of 65% and MegaBACE 55%. But after the first year, the margin on MegaBACE should improve to 65% or higher. To summarize, we believe that the stock is oversold. The above problems are temporary. Even with them, the company will still post more than 10% revenue growth in the fourth quarter, compared to the same period in 1996. For the year, the company will post a moderate 13% increase in revenues and 50% increase in EPS. Despite the negatives, we see opportunities ahead, with the stock trading at approximately 15 times our estimated 1998 EPS. We continue to recommend the stock to those aggressive investors. (Posted 1/9/98 with MDYN closed at $10)