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Health-Care Reformer: Under the Radar

Emergent Group helps private medical centers gain access to state-of-the-art equipment. It's one company that may profit from health-care reform.



) -- Companies that are able to reduce the country's exorbitant health-care costs will prove to be lucrative investments. One pint-sized company to consider is

Emergent Group


, owner of

PRI Medical Technologies

, which provides surgical equipment on a fee-for-service basis. The Sun Valley, California-based firm focuses on independent hospitals that are unable to afford specialized surgical tools, specifically, advanced laser technologies.

Emergent Group is minute, with a market value of $52 million and fiscal 2008 revenue of around $23 million. A company of such small stature presents unique investment risks, principally, thin trading volume. Just 9,500 Emergent shares exchange daily, making it a comparatively illiquid security. However, the company offers a lesser-known growth story and sound fundamentals. Over the past three years, Emergent has increased revenue 25% annually, on average, and boosted net income 37% a year.

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Its business isn't only profitable, enjoying a gross margin of 47%, but sensible. Hospitals incur a hefty cost for surgical equipment. And purchasing such equipment entails risks: What if demand for operations declines? What if a superior technology emerges? What if the equipment is damaged? A health-care center is required to bear the aforementioned risks when it buys new equipment. Contracting with PRI Medical Technologies eliminates those risks in a cost-effective manner.

In addition, Emergent offers expertise to accompany its rentals, providing hospitals with technical staff experienced in the application and maintenance of equipment. Emergent Group is an appealing investment because it's built upon the maxim of specialization. By focusing on one area of health care and investing its time and money appropriately, it offers a compelling value proposition: providing hospitals, and their patients, with access to state-of-the-art treatments at a reduced cost.

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.

-- Reported by Jake Lynch in Boston.