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This company, which changed its name from Inverness Medical Innovations in 2010, has long been an impressive growth story. Sales shot up from $487 million in 2006 to more than $2 billion in 2010, thanks to rising demand for its health-related diagnostic kits. The kits help consumers and doctors quickly learn of exposure to a range of infectious diseases, various cancers, drug abuse and women's health issues.
But the slowing economy has cooled demand for many of these tests, as consumers dial back discretionary spending on health care. Sales are expected to grow about 10% this year, but would have actually shrunk were it not for a few tuck-in acquisitions. This has pushed the stock down from about $40 this past spring to a recent $26. The forward earnings multiple, as a result, has now slipped below 10.
But a turn may be at hand. Alere delivered a better-than expected third quarter, highlighted by earnings per share (EPS) of 67 cents -- 8 cents ahead of consensus forecasts. A deeper look at the quarterly results reveals a clear trend: Diagnostic tests ordered up by doctors is showing rising demand, while consumer demand for at-home tests appears to be flattening. This trend is likely to continue if the company prevails in its bid to acquire Anglo-Norwegian Axis-Shield, which offers a range of professional diagnostic-testing services.
After the steady drop throughout 2011, shares now trade for just four times projected 2011 free cash flow (according to Goldman Sachs forecasts). The key to a rebound back to the $40 level is proof of sustained growth in 2012 and beyond. The just-released quarter is a start. A few more quarters like this, and investors are likely to warm up this stock once again.