Editor's note: This column was submitted by Stockpickr member Susanne Owen, also known as the Trading Nymph.
series is proving successful, but what about the companies whose technologies really could rebuild a Jaime Sommers into a bionic phenom?
It's been about a month since Jim Cramer featured his bionic picks on "Mad Money." So after recent earnings reports, buyouts news and DOJ settlements, the question arises: Have these proven good, constructive picks for building a powerful portfolio -- especially in light of the fact that the
has fallen about 7.8% since then?
Oct. 10 "Mad Money"
, starring the "always dashing" Jim Cramer, featured
Smith & Nephew
, two orthopedic products makers that build the replacement parts needed to fix faulty joints like hips and knees. Cramer also featured
( ACL), which makes surgical equipment and devices as well as consumer eye-care products to treat eye diseases and disorders.
Oct. 12 "Mad Money" show
, Cramer featured
( TTG) as a speculative play. The company uses a process of tissue preservation to deliver sterile bio-implants that are used to repair various bone and other tissue defects in dental, spinal, urology, ophthalmology, head, neck and general surgery procedures. And finally, on his
Oct. 16 show
, Cramer featured
( SNCI), which makes small, powerful hearing aids, as another speculative play.
A couple of these bionic plays have since had to fight the Department of Justice. On Sept. 27 Smith & Nephew signed an
agreement with the DOJ
to defer prosecution. At issue was whether Smith & Nephew (along with
Johnson & Johnson
subsidiary DePuy Orthopaedics) gave kickbacks to doctors for choosing their products.
All of the companies deny being involved in a kickback scheme but entered into agreements. The agreement requires that each company list the doctors who they paid a consultant fee. They also agreed to pay $311 million as part of the settlement, with Zimmer paying 50% of that amount. If the companies comply with government oversight for 18 months, the charges against them will be dropped.
Stryker, which worked with the federal government from the start of the investigation, was not required to pay any fine. The company, however, had a few other concerns that have since been resolved. Stryker and its former outpatient therapy division, Physiotherapy Associates, agreed to pay $16.6 million to settle allegations of filing false claims to federal health care programs. The U.S. Justice Department announced the settlement this past Wednesday.
So is Jaime Sommers really worth her high price tag? With the ongoing writers' strike, don't count on any titillating story line to reveal the answer to that question anytime soon. To uncover the truth, let's look at the slew of recent earnings results and see how she grades.
For the report card, Stryker on Oct. 17 reported strong third-quarter earnings results that showed an 18% rise in sales to $1.45 million, beating estimates by $5 million. International sales grew 11%, showing strong growth in Latin America particularly. Profits rose 21% from a year ago to $229 million, or 55 cents a share. The company met earnings expectations and topped sales.
Stryker's management also discussed how Britain-based Corin Group recently won U.S. approval for its Cormet hip implant, which Stryker, as marketing partner, has been training doctors here how to use. The implant will compete with a Smith & Nephew hip product. This past Friday U.S. regulators approved further sizes of its Cormet hip replacement product and Stryker should receive its first shipment in early 2008.
On Nov. 13 Bear Stearns upgraded Stryker to outperform citing its $2 billion in cash and a good balance of revenue from large joints, spine/trauma and surgical products as a reason for expected earnings growth of 20% to continue through the end of the decade. The stock, which closed Oct. 10 at $73.33, closed on Nov. 23 at $70.64, for a 3.7% decline. That is much better than the 7.8% the S&P suffered in the same time period.
The other joint replacement play, Smith & Nephew, had a little bit of a harder time when it reported quarterly results on Nov. 1. While revenue rose 24% in the third quarter to $845 million, net profit fell 86% to $13 million from $92 million. The stock, which closed Oct. 10 at $62.53, is now trading around $59, which is about a 5% decline -- again performing better then the S&P during the same time period.
On Nov. 19, Smith & Nephew announced the sale of its endoscopy division's vascular business to InaVein. Terms of the sale were not disclosed.
Next, we look at optic maker Alcon, which on Oct. 24 reported third-quarter earnings that showed steady sales growth. Profit rose 79% to $415.3 million, or $1.38 a share, while revenue climbed to $1.3 billion from $1.2 billion the year before. The Street was looking for earnings of $1.32 a share on revenue of $1.35 billion.
Management at Switzerland-based Alcon sees emerging markets as important drivers of the ophthalmic market in the coming years. Emerging markets post sales growth rates almost
that of developed markets, this year coming in at 19.7% (15.5% of total sales). Alcon, which has been repurchasing stock, also raised earnings guidance for the year.
Alcon is working with the Food and Drug Administration for approval for nasal allergy spray Patanase, hoping for action in first half of 2008. In addition, it has a dry eye prescription treatment in the second part of a phase III study with hopes for FDA approval in a couple of years or sooner.
On Nov. 6, Alcon received all necessary regulatory clearances for its proposed purchase of a stake in WaveLight AG. Once the payment is completed, Alcon will own 77.4% of WaveLight's outstanding shares. WaveLight develops, manufactures and markets innovative refractive laser and diagnostic systems, including the Allegretto laser system for refractive eye surgery.
Alcon raised EPS guidance by 10 cents from bottom and a nickel on top. The stock closed on Nov. 23 at $140.37, which was a 7.6% drop from the $151.85 price it held on Oct. 10.
Then there's Sonic Innovations, which reported its best quarter ever on Oct. 30, with a 400% increase in year-to-date pretax income. CEO Sam Westover opened the quarterly conference call by welcoming their two new analysts by name; management is so proud the company now has three analysts covering it. Sonic posted a 19% rise in sales to $30.8 million from $25.9 million the year before.
The company has three new products, including Velocity, a hearing aid that automatically adjusts. Velocity came out only in late summer and will be coming out in Europe in the fourth quarter.
The company also indicated that it plans to bid for the U.S. Veterans Affairs contract, which comes up for bid next year. This contract comes up every five years, and the last time it did the company was too new. Sonic pointed out that it's the only company located in the U.S. that will be bidding.
This stock, which closed on Oct. 16 at $9.76, hit a 52-week high of $10.29 on Oct. 31. During the conference call, management indicated that in the past, a lot of employees sold when the stock hit around $9 because of the run up. This may be the case again. The stock is currently trading around $8.90.
And finally there's Tutogen Medical. This company may be changing networks. On Nov. 13 health care supplier
announced a deal to acquire Tutogen in an all-stock deal valued at about $263 million, or $12.86 a share.
Regeneration shareholders will own around 55% of the combined company and Tutogen shareholders will own about 45% upon completion of the deal, which is expected to close in the first quarter of 2008 pending shareholder approval. At the time of the announcement Tutogen shares hit $11.92, but they've since fallen to $10.60 on Nov. 23, which is about an 8.2% drop since it appeared on "Mad Money."
Regeneration's net income is actually a loss of $6.18 million, or a loss of 20 cents a share and a PEG of 14.9, which may make Tutogen a riskier stock if the transaction goes through in 2008.
The Bottom Line
Stryker and Smith & Nephew have dropped, but they've performed better than the S&P, and with their quarters and DOJ behind them, both should do well once the market gets on sturdy legs.
Alcon was on par with the S&P loss, but keep in sight Alcon dominates the U.S. market with more than 50% of market share. In addition, Alcon controls nearly three-quarters of the non-U.S. market. So Alcon should see it through.
As for Sonic Innovations, this is a snail-shaped cochlea (a little ear anatomy humor), or coiled spring ready to pop with nothing appearing to be in its way except overall market panic and possible economic slowdown. But, with even that, people and health plans may still pay up in order to correct the effects of damage caused by too many Jimmy Hendrix Concerts all those years ago.
For Tutogen, well this is a wait-and-see. It does a lot of business with Zimmer and a question arises whether a rival offer could be made. If the deal goes through with Regeneration it may succeed. But on the other hand, this deal may mean the poor Bionic Woman may be stuck doing mattress commercials. We will have to wait for next season to see. (Check out the
portfolio I built at Stockpickr.com for an explanation.)
Please note that due to factors including low market capitalization and/or insufficient public float, we consider Sonic Innovations and Tutogen Medical to be small-cap stocks. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.
At the time of publication, Owen was long Stryker and Sonic Innovations, although positions may change at any time.
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