Health-Care Reformer: Under the Radar
In the latest quarter, Emergent's net income climbed 12% to $830,000, and earnings per share rose 9% to 12 cents. Revenue advanced 25% to $8 million. The company's operating margin remained steady at 21%, but its net margin slipped from 12% to 10%. Emergent maintains a liquid balance sheet, with $6 million of cash and short-term investments, and $4.7 million of debt. Its quick ratio, at 1.7, and debt-to-equity ratio, at 0.5, demonstrate fiscal prudence.
The stock's valuation emits conflicting signals. The shares are expensive, relative to the health-care providers and services peer group, based on book value and sales. However, they're inexpensive when considering trailing earnings and cash flow. The company's quarterly return on equity hit 45%, beating the industry average and S&P 500 Index. Return on assets touched 23%. Emergent's outstanding growth and profitability justify a premium share price. Still, risks are aplenty.
The medical-laser market is expected by analysts to grow between 9% and 13% annually over the next few years. Although industry growth prospects support an investment in Emergent, they also increase the likelihood that existing competitors expand and new competitors emerge. We nevertheless remain optimistic about Emergent Group and rate its shares "buy." Another redeeming feature, rare for a small-cap, is a hefty annual dividend. This year's distribution is 40 cents, a 33% increase from 2008, equating to a 5.6% yield and a 63% payout ratio.
Emergent has risen 6% this year, less than major U.S. indices. But, over the past five years, it's returned 31% annually, on average.
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