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Dr. Paul Price
Dr. Paul Price
Articles (500)  | Author's Website |

Heal Your Portfolio with Kinetic Concepts - KCI

July 02, 2009 | About:
Kinetic Concepts- [NYSE:KCI] Jul. 2, 2009 $26.54

52-week range: $17.86 (Dec. 24, 2008) - $43.02 (Jul. 23, 2008)

KCI is the leader in advanced wound care via Vacuum Assisted Closure [VAC] utilizing negative pressure wound therapy [NPWT]. They operate about 141 U.S. and 67 foreign, service centers with domestic revenues running about 76%.

Since its February 2004 IPO sales and earnings (from continuing operations) have risen steadily. Here are their per share numbers as reported by Value Line:

Year …... Sales ….. C/F …... EPS …... B/V ….. Avg. P/E

2004 ….. 14.45 …. 2.50 …. 1.63 ….. 0.74 …… 30.8x

2005 ….. 17.19 …. 3.39 …. 2.32 ….. 2.72 …… 24.6x

2006 ….. 19.47 …. 3.96 …. 2.69 ….. 5.06 …… 14.0x

2007 ….. 22.31 …. 4.59 …. 3.31 ….. 9.38 …… 16.3x

2008 ….. 26.63 …. 5.56 …. 3.57 …..11.50 ……10.4x

Zacks is estimating $3.68 and $4.22 for 2009 and 2010 making the expected multiples just 7.2x this year’s and 6.3x next year’s expectations. Both those numbers are well under all historical levels as can be seen from the chart above.

A rebound to even 10x 2009’s estimate would lead to a 6 – 9 month target price of $36.80 or up

> 38% from today’s close of $26.54/share. Is that reasonable? Sure. Kinetic Concepts shares hit peak prices of $78.40, $76.20, $49.10, $66.80 and $54.80 in 2004-2005-2006-2007 and 2008 respectively- all when fundamentals were less favorable than they are today.

rates KCI as 4-stars (with 5-stars being best) and estimates ‘fair value’ as $37/share.

Value Line has a 3 – 5 year target price range of $70 - $100.

The main risks here are increased competition in VAC and the possibility of lower future Medicare reimbursement rates. The current low valuation seems to more than reflect any potential bad news in the near future.

With solid upside and a good balance sheet, Kinetic Concepts appears to offer a good

risk/reward in today’s market.

Here’s a conservative combination play that will provide a very nice return from here through December 18, 2009 even if these shares do absolutely nothing:

Kinetic Concepts Combination
.......Cash Outlay...............Cash Inflow

Buy 1000 KCI @$26.54 ................$26,540

Sell 10 Dec. $25 Calls @$3.90 .......................................$3,900

Sell 10 Dec. $25 Puts @$2.30 .......................................$2,300

Net Cash Out-of-Pocket ...............$20,340

If Kinetic Concepts shares remain at > $25 on the 12/18/09 expiration date:

• The $25 calls will be exercised.

• You will sell your shares for $25,000.

• The $25 puts will expire worthless.

• You will have no further option obligations.

• You will hold no shares and $25,000 cash.

That would result in a best-case scenario profit of $4,660 on your original cash outlay of

$20,340 for a net profit of 22.9%.

That very nice gain would have been achieved in just 5.5 months on shares that:

• Moved up.

• Stayed unchanged.

• Fell back by up to $1.54/share or (-5.8%) from the trade’s inception price.

What’s the risk?

If Kinetic Concepts shares close < $25 on the 12/18/09 expiration date:

• The $25 calls will expire worthless.

• The $25 puts will be exercised.

• You will be forced to buy another 1000 shares of KCI.

• You will need to lay out an additional $25,000 cash.

• You will have no further option obligations.

• You will hold 2000 shares of KCI.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s their $26.54 /share purchase price less

the $3.90/share call premium = $22.64 /share.

On the ‘put’ shares it’s the $25 strike price less the $2.30 /share

put premium = $22.70 /share.

Your net break-even price is thus $22.67 /share.

KCI shares could drop by up to $3.87 /share or (-14.5%) without

causing a loss on this trade.

Disclosure: Author is long KCI shares and short KCI puts.

About the author:

Dr. Paul Price

Visit Dr. Paul Price's Website

Rating: 3.0/5 (7 votes)


Larry363 - 7 years ago
Nice analysis. It is a good idea for trading.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Zacks likes KCI too.

Kinetic Concepts Inc. July 27, 2009

Kinetic Concepts, Inc. (KCI - Snapshot Report) reported second-quarter results on July 21 that surprised on estimates by 2.08%.

Earnings per share were 98 cents compared to analysts' estimates of 96 cents.

Revenue grew 6% to $491.3 million compared to the second quarter of 2008. Foreign currency translation negatively effected revenue by 4% in the quarter.

The company saw strength in the Worldwide V.A.C Therapy segment as revenue rose 3% to $349.4 million year over year.

Regenerative Medicine, or LifeCell, which accounts for 15% of total revenue, climbed 22% to $71.1 million on a pro forma basis. The company completed its acquisition of LifeCell in May 2008.

Sales of Strattice, its porcine-based regenerative tissue matrix which launched in Mar 2008, generated 31% of the total LifeCell sales in the quarter, up from 10% of the total in the year ago period.

Reaffirmed 2009 Guidance

The company reaffirmed prior 2009 earnings per share guidance in the range of $3.95 to $4.10.

Covering analysts responded by raising full-year consensus estimates by 15 cents to $3.97 per share to be in line with the company's forecast.

Third-quarter estimates fell, however, to 88 cents from $1.02 per share. in the last week even though 4 out of 8 covering analysts raised and 2 lowered during that period.

Value Fundamentals

Kinetic Concepts, which manufactures health care products for advanced wound care, negative pressure wound therapy and therapeutic support systems, was a Zacks #1 Rank (strong buy) stock when I last reviewed it on Jul 1. It is now a Zacks #2 Rank (buy) stock.

It is still cheap, trading at just 7.4x forward earnings.

Dr. Paul Price
Dr. Paul Price premium member - 6 years ago

Kinetic Conepts

A jury ruled that British medical-technology rival Smith & Nephew had infringed on two of the company's wound- therapy patents.

KCI closed on March 12 at $48.92

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