It’s been quite a while since I looked at anything by Mark Skousen, but I had quite a number of queries about this teaser ad last week … and I confess, it piqued my interest a bit, too. So what is his “Comeback Stock of 2010?”
Well, he’d be happy to tell you, of course … assuming you’re interested in a subscription to his Skousen Turnaround Trader newsletter, which will cost you about a thousand smackeroos. But he did provide a meager little supply of snack-size clues, so perhaps we can identify this one on our own, eh?
Here’s how he gets our taste buds tingling:
“This company promises to have one of the most exciting, money-making comeback stories of the year! Here’s your chance to get in on it….”
“Every once in a while, I uncover an amazing opportunity with out-of-this-world short-term profit potential that I’m bursting at the seams to share with my most valued Forecasts & Strategies subscribers. Recently, I ran across such an opportunity.
“As I hope you’ll soon find out, my next HUGE opportunity is a medical device company whose shares are positioned to shoot through the roof! …
“This stock could easily become the Comeback Stock for 2010. In fact, I’m convinced that one of or both of the following things is about to happen:
“This company is about to experience off-the-charts growth, and/or…
“A much larger company (many of which have been watching this medical wonder stock) is about to place their bid to acquire them.
“Either way, early investors win.
“This medical device company is a leader in the development of tools that are designed to make it simpler, and less invasive, to diagnose and treat vascular disease. Because the number of cardiovascular patients is increasing (largely as a result of our aging population, poor diets, and inadequate amounts of rest and exercise), demand for this company’s tools is set to skyrocket.
“It’s products have already been used in over 500,000 cardio procedures worldwide and it’s the “golden child” of this growing industry. In fact, it’s just been granted FDA approval to market a new and improved version of it’s revolutionary device (a device that industry professionals have been tearing at the seams to get their hands on!).
“And adding to the prospect of the company… huge medical companies have already invested millions and more are likely to follow suit!”
Normally this would cause your friendly neighborhood Stock Gumshoe to have to do a bit of flexing and straining, trying to dredge up something useful from a sea of largely empty clues … after all, “vascular disease tools” and “new improved version approved” and “used in over 500,000 procedures” doesn’t exactly one of those nice clue-filled letters where the copywriters do most of my work for me.
But this time, we start out with an extra advantage: We know that there’s a little vascular toolmaker that Skousen has been gaga over for years … and these clues happen to match up with that little company, so instead of hacking through with a machete we get to stroll down a little forest path to find our quarry: Volcano Corporation (VOLC click here for a free trend analysis on VOLC from MarketClub, one of my advertising partners, this one is green arrows all the way at the moment).
Skousen has publicly touted these shares at least a few times — last I saw was in August — and he’s also teased the stock before, I wrote a very brief note about a teaser ad he ran using VOLC almost three years ago, when the company had been public for less than a year and was trading near all-time highs in the low-$20s.
Volcano Corp. is a company that primarily makes intravenous ultrasound machines, and the primary use seems to be in cardiovascular operations (particularly defining and locating problems with blocked arteries, determining where to put stents, etc.). Their market-leading catheter is called the Eagle Eye, and they did just get FDA approval for the “Eagle Eye Platinum” version of the product, which naturally is an upgrade from “gold,” though I can’t say whether anyone’s “tearing at the seams” to get ahold of it. They call themselves a “Therapy guidance and enabling company” … here’s how the company describes itself:
“Volcano Corporation develops, manufactures and commercializes a broad suite of devices designed to facilitate endovascular procedures, enhance the diagnosis of vascular and structural heart disease and guide optimal therapies.
“The Company’s intravascular ultrasound (IVUS) product line includes ultrasound consoles that can be integrated directly into virtually any modern cath lab and single use disposable imaging catheters unique to our system. Our IVUS offerings are used by clinicians to measure the stage and severity of disease present in cardiac and peripheral vessels. IVUS is also used in post-stent placement procedures to confirm adequate expansion of the stent and full apposition to the vessel wall. Volcano IVUS offers unique features, including both phased array and rotational IVUS imaging catheters and advanced functionality options, such as VH® IVUS tissue characterization, ChromaFlo® and FFR (fractional flow reserve) technology.”
VOLC did take a bit of a hit during the market downturn, and the stock was pretty weak for all of last year, but over the last couple months it has started to rebound nicely, coming up from about $15 in December to where it stands now, again over $20 for the first time since 2007.
It does seem like the company is in an interesting space, they’re ambitiously expanding into new areas that tie into their expertise in imaging, including integrated imaging and therapeutic devices that can now share the same hardware — including devices that combine imaging and the balloon angioplasty tools, for example. For the big integrated systems, they say that there’s essentially a duopoly between Volcano and Boston Scientific; for the functional measurement tools it’s apparently a race between St. Jude and Volcano (that’s just going from Volcano’s presentations, I haven’t confirmed this info).
There does seem to be some reason for optimism, though Volcano’s stock is quite expensive — they are developing data to prove that their imaging can help improve outcomes and lower costs, either by property targeting treatment areas, or by determining which problems don’t require treatment at all. They have differentiated their technology in two growing markets, both of which apparently enjoy duopolies (ie, probably no dramatic price competition) — and they do continue to develop new integrated products, like their combined angioplasty/imaging tool that’s now approved in Japan (pending 2011 approval in the US), and new products with better imaging or measurement, including optical systems (as opposed to ultrasound) that they’ll be able to use in upgrading existing systems, a capability that they expanded greatly with their acquisition of Axsun (they were recently found guilty of breach of contract in a competitor’s complaint relating to this deal, just FYI, though they say they’ll appeal and believe it shouldn’t have a material impact).
And financially, things also look pretty compelling — they are continuing to see growth of better than 20% a year in revenues, which they think they can do for many years to come, and they see 2010 being the beginning of sustainable profitability and operating leverage that will lead to margin expansion. That growth is being counted on by investors, of course, which is why the shares trade at a forward PE of about 350 based on what analysts expect will be six cents per share in earnings this calendar year. They raised their guidance for revenue for 2010, and for the fourth quarter of 2009, in a press release back in January, but won’t actually be releasing the final 2009 report until early March. They also gave a fairly detailed presentation at a JP Morgan conference back on January 12, which is worth viewing to get a good overview of the company and the reasons for their optimism.
This is the first time I’ve thought about Volcano in a long time, but the company has come a long way in a few years — the business model sounds very impressive, and I like that they now have a decent installed base of well over 4,000 units, which gives them leverage as they sell the high-margin disposable tools (wires, etc) that are used in every procedure. They say that their integration and expansion plans will bring them from an addressable market of $550 million to $3 billion, which if true could be critically important — they’re already at about $220 million in revenues, so if their market was capped at just twice that amount you’d probably have a hard time justifying the current valuation. To give some perspective, their partial competitor Boston Scientific (which, to be fair, has been snake bitten for a while) trades at a price/sales ratio of about 1.4, and another growth dependent high tech device maker, Intuitive Surgical, trades at about 12X sales (I mention ISRG largely because they rely on the same upgradeable machine/disposable tool model to leverage earnings growth, though they’re far more profitable) … VOLC trades at about 5X sales.
To justify paying 5X sales and 350X earnings you do have to really believe that revenue growth will continue at this solid 20-25% pace (at least), and that earnings should accelerate faster than that as their margins improve, both of which look feasible but are, of course, far from being guaranteed. This year should be a key one for VOLC, if their new products are as successful as they think they’ll be, and if they can turn that consistent revenue growth into accelerated earnings growth this could indeed be a great “turnaround” story, as Skousen seems to be promoting here. I don’t know if Skousen pushed the stock all the way down in 2008, or if he’s been aggressively urging his readers to buy all along, but I do know it’s been a favorite of his several times in the past — which doesn’t mean it’s either good or bad, of course, just that we shouldn’t imagine that the stock just came to Skousen’s mind because of its huge turnaround potential for this particular year.
And yes, I also have the same visceral reaction as I did three years ago: it’s probably a good thing that their devices are marketed to professionals, and not necessarily straight to patients as Intuitive Surgical’s Da Vinci is — I know their main product is called the Eagle Eye, and that’s just fine, but when you’re going to stick something in my veins I’d really like to know why you chose to call the company “Volcano.”
If you’ve got an opinion on Volcano Corp that you’d like to share, or if you’ve had a red hot volcano in your veins, by all means, comment away in the box below. And if you’ve subscribed to Skousen’s Turnaround Trader, please click here to let us know what you thought (you might be the first to review this one, though we have heard from a couple subscribers of Skousen’s less expensive Forecasts & Strategies newsletter, you can see those reviews here).