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.
Morningstar 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.
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.
Morningstar 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.
