Isolyser Still Covering Its Market; Steris and Moore Also Look Solid

This week, I'll continue updating you on previous companies I've written about on RealMoney as I did with last week's column. With my bearish outlook, I'm shy to add new positions in companies I've not followed for long to InsiderInsights' Recommended List.

My comfort level with the following firms is quite high, however. Even though they may be above my original recommended price (as well as the price that insiders purchased at), I still feel that they are good buys. Not only have their stocks held up relatively well in this messy market, more importantly, they are turning in solid financial results.

Isolyser Stays on Track

Management at Isolyser(OREX Quote) continues to deliver on its stated goals, and the stock still looks like an excellent one in which to initiate a position (I first wrote about it in December).

For its first quarter, the company reported revenue that increased 30.3% year over year to $21.2 million, and EPS increased from 1 cent last year to 3 cents. This impressive comparison was owed mainly to Isolyser's purchase of Deka in the first-quarter last year, though, so don't expect this type of year-over-year top-line growth in the coming quarters.

What investors can count on is for slow internal growth to magnify itself on the bottom line as the firm's newly tightened cost structure squeezes out profits from each sales dollar. So even though in its seasonally slow first quarter, revenue increased only a tad over the fourth quarter, Isolyser's operating margin rose from 3.7% of revenue to 7.4%. This allowed the company to eke out an extra half a penny in EPS from operations.

Organic top-line growth of Isolyser's main products, which are specialized sterile covers for hospital equipment, should be all that's needed to enable the company to earn about 15 cents a share this year. But I'd be surprised if Isolyser merely plods along for the rest of this year happy with slight sequential increases in revenue and EPS. Management clearly has its eyes on undertaking more acquisitions, and is already assessing targets. And any acquisitions Isolyser makes will likely be of complementary product lines that are now owned by larger firms, not of another small medical firm in its entirety.

"We're finding that large companies are interested in clearing up the noise factor for their sales forces," said Isolyser CEO Dan Lee in a recent call. "This gives us a good opportunity."

What I like about management's approach at Isolyser is that when it says it isn't interested in dilutive acquisitions just to make some splashy top-line growth, it seems to mean it. Isolyser intends to use its own cash and an established line of credit to make any purchases.

So if and when this firm announces another acquisition, which I expect it to do in the next two quarters, it's a good bet that this year's EPS will benefit. This is why my range of EPS expectations goes as high as 18 cents for 2002.

I still expect Isolyser to garner a 25 forward multiple at some point this year, which translates my 15 cents to 18 cents EPS estimate into a $3.75 to $4.50 price tag for OREX.

Clean Performance at Steris

I'm also quite impressed with the quarterly performance of Steris(STE Quote). When I first profiled this provider of hospital sterilization equipment, I noted the impressive profit and loss focus of new CEO Les Vinney. Even if top-line growth were muted, he promised the Street that he would deliver huge profit gains by streamlining operations. He backed up that promise with a $130,000 buy-in of stock in March 2001, and another $70,000 purchase in December.

Vinney has surely delivered the goods. Operating income has surged at least 25% sequentially for five straight quarters. Year over year, EPS growth has been tripling.

It now looks as if hospitals are again increasing their spending on sterilization equipment. In the March quarter, sales grew 12% from year-earlier levels, sharply up from negative-to-flat comps in earlier quarters.

With a combination of more streamlining and renewed top-line growth, Vinney told analysts to look for 30% EPS growth in fiscal 2003. Right now, the stock trades for about 24 times forward estimates. So more upside may be at hand. The slow-growth nature of this industry should ultimately limit the multiple, so we'd tend toward selling if the stock breaks into the upper $20s.

For now, though, it's prudent to let this winner ride, and with the expectations of another 15% to 20% gain, it is arguably not too late to take a position in STE.

Moore Is Good

On the theme of impressive turnarounds, you can chalk up another nice quarter to Moore(MCL Quote), which I wrote about in April. The forms/labels/office supplies/business services vendor continues to trim fat, which is leading to very strong EBITDA gains. Sure, sales were down 8% from a year ago in the first quarter, but costs were 11% lower. That helped the company to swing to an 11-cent EPS profit from a 7-cent EPS loss a year ago.

Here again, investors have taken notice. The stock has been steadily rising and is now at levels not seen since 1998. To push the stock yet higher, revenue growth will need to return, and management has laid out two steps to get there: new contracts and acquisitions.

On the first score, progress is being made. Key contracts, such as a three-year, $200 million deal with UnitedHealthcare(UNH Quote), are being inked, and management is confident that future revenue comparisons will be positive. And the company has admitted to discussions with a wide range of acquisition candidates. After cleaning up its balance sheet, Moore is now well-positioned to gobble up smaller niche players that will flesh out its product and service offerings.

In the absence of further deals, management still has more internal efficiencies to achieve. The company is comfortable with earnings models that show further cost cuts and rising EPS throughout this year. Full-year EPS should come in at about 49 cents this year, and management believes that modest top-line growth can lead to EPS of 80 cents next year. Of course, further weakness in the economy would derail that outlook. But any pickup in the economy would boost it.

Overall, I think that Moore now has a lot of momentum behind it and that the stock can keep trending higher.