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Get Four
|  | DECEMBER 14, 2004
 FOCUS STOCK By Robert Gold Kinetic Concepts Makes the Cut [Page 2 of 2] SUBSTANTIAL UPSIDE. Recently priced at about 30 times our 2005 EPS estimate of $2.25 -- and about 3.8 times estimated 2005 sales -- the stock trades at a premium to our medical-device coverage and the S&P 500 index. However, it remains at a discount to similar small and mid-cap names within our medical-device coverage group. Despite the stock's strong appreciation since the company's February, 2004, initial public offering, we feel there remains significant upside potential amid rising physician acceptance of the VAC system, and we note that increasing estimates of the worldwide market opportunity for the device and related consumables has created, in our view, a favorable backdrop for increased sales and earnings forecasts heading into 2005. Our 12-month target price of $85 a share, representing potential upside of 23% over recent levels, is derived from our forward price/earnings multiple expectation; our discounted cash-flow approach to an intrinsic value calculation generates similar results. From our perspective, the company has significant growth opportunities that will allow it to generate an average of 23% sales growth and 29% EPS growth over the next three years, which compares favorably to both our medical-device coverage and the S&P 500 index. POTENTIAL NEGATIVES. Applying a peer-average 2005 p/e ratio to estimated three-year EPS growth (PEG) ratio of 1.3 to the shares results in a target of $85, or roughly 38 times our 2005 estimate of $2.25. Our discounted cash-flow model calculates intrinsic value at about $83 a share. Risks to our recommendation and target price, in our view, include adverse changes in government or private pay reimbursements; an inability by the company's V.A.C. systems to capture increased share of the global wound-care market; unfavorable outcomes in patent litigation concerning the V.A.C. technology; and additional secondary offerings of Kinetic common stock.
 Analyst Gold follows stocks of medical-device companies for Standard & Poor's Equity Research Services All of the views expressed in this research report accurately reflect the research analyst's personal views regarding any and all of the subject securities or issuers. No part of analyst compensation was, is or will be, directly or indirectly related to the specific recommendations or views expressed in this research report. Standard & Poor's Regulatory Disclosure Any advice, analysis, or recommendations contained in articles labeled "Insight from Standard & Poor's" reflect the views of Standard & Poor's, which operates separately from and independently of BusinessWeek Online. It is possible that BWOL may from time to time publish information that is not consistent with advice, analysis, or recommendations that are published by Standard & Poor's. Standard & Poor's and BusinessWeek Online are each units of The McGraw-Hill Companies, Inc. Get BusinessWeek directly on your desktop with our RSS feeds.  Add BusinessWeek news to your Web site with our headline feed. Click to buy an e-print or reprint of a BusinessWeek or BusinessWeek Online story or video. To subscribe online to BusinessWeek magazine, please click here. Learn more, go to the BusinessWeekOnline home page  | | |
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