Nicholas Maithya writes: Natus Medical (NASDAQ:BABY) is up more than 125% over the last twelve months and based on recent results, that run seems fully justified with room left for more. The stock closed at $33.51 on Thursday 23, up 2.16% for the day following its impressive results released on the previous day.

However, the most notable part is that the company has been on a rally since mid-October last year. On October 14, 2013, the stock closed at $14.88, but the price is now up more than 125% to $33.51 per share. The stock price seems to suggest that the buyers are dominating the market, with the fast stochastic RSI already pegged at 100, while the slow stochastic RSI is just above 61. This may suggest that there could be a short-term pullback for the stock, but long-term outlook remains bullish.

Chart via Quantshare.com

Natus Medical, which provides neurodiagnostic and newborn care products and services across the globe, uses new age technology to execute its business. The company has experienced sequential growth over the last three quarters in the process topping $1 billion in market valuation.

Natus Medical Q3 Earnings in Focus

On Wednesday 22nd, Natus Medical reported record Q3 non-GAAP EPS of $0.33 a 10 percent increase from last year’s $0.30 diluted non-GAAP EPS. The company also reported 5 percent increase in revenue to $89.9 million compared to $85.4 million reported in Q3, 2013. GAAP net income also increased significantly to $7.8 million or $0.24 per share compared to last year’s $6.3 million or $0.20 per share.

The company’s revenues were boosted by improved economic conditions in North America, while Europe continued to dwindle. During the company’s earnings conference, the company’s CEO, James B. Hawkins expressed that Grass acquisition is likely to affect the overall margins for 2013, since the newly acquired unit has lower margins compared to the parent Natus Medical.

Natus Medical is on course to reporting close to $1.00 per share in GAAP net income based on the current run-rate. The company reported $0.67 per share in GAAP net income for the three months ended September 30, 2014. Natus’ recent quarter GAAP EPS of $0.24 per share puts it closer to achieving the $1.00 GAAP EPS target for the current year. On the other hand, Analysts expect a non-GAAP EPS of $1.24.

The company leadership was optimistic following a quarter that delivered record results on both top line and bottom line, as well as, a significant organic growth.

"I am very pleased with our third quarter results as we achieved record revenues and earnings. Both revenue and earnings exceeded the top end of guidance. I am most satisfied with our 63% gross profit margin as well as recording over 5% organic revenue growth. Consistent organic revenue growth and improving margins have been major goals for Natus in 2014 and our results demonstrate significant progress to the achievement of these goals," said Jim Hawkins, President and Chief Executive Officer of the Company.

Valuation

Natus Medical trades at 36.19x price to earnings ratio for the trailing 12-months, while the forward PE for period ended Dec 2015 is estimated at 23.61x. The forward P/E ratio values the stock at about $33.52 based on the 2015-estimated non-GAAP EPS of $1.42 per share.

Therefore, the stock appears to be valued at par. However, a year ago, analysts had estimated an EPS of $1.05 for the company for year 2014. Since then, this estimate has been revised upwards as they currently expect it to post $1.24 non-GAAP EPS this year.

This means that we cannot rule out upward revisions in the coming quarters, which could raise the current EPS estimates for 2015. Furthermore, based on the promise depicted by the company’s recent performances, Natus Medical has the ability to continue trading at current P/E ratio of 36x or at least 30x for the next twelve months. This means that the stock could possibly rise to trade at about $40-$50 per share during that period.

Just 8 years into the market, Natus now has the largest neurodiagnostic and service organization in the world. The nature in which the industry is growing can only promise upside returns in the future, which has drawn a lot of optimism from the management. A huge market share and growing margins will spur the company’s growth in the next few years.

The Risks

Overall, Natus Medical is not one of the biggest companies (in term of financial muscle) out there, and faces competition from the likes of Johnson & Johnson (NYSE:JNJ), a renowned global brand in biotechnology and pharmaceuticals. Johnson &Johnson is a mega-cap company, and this is gigantic compared to Natus Medical’s $1.05 billion in market valuation.

JNJ is a potential threat to Natus in terms of market share retention. If the industry continues to grow rosier, then JNJ, given its financial muscle, could potentially launch similar or better products compared to what Natus currently offers.

Conclusion

Natus Medial’s recent rally is well justified and based on Q3 results, as well as, the results for the last nine months; the company seems well poised for more growth in the coming quarters. In just over 12 months, Natus has doubled in value, rewarding investors with massive capital returns. Expectations show that this growth is likely to continue, with earnings expected to grow by a double-digit figure in the next few years.

By Nicholas Maithya

Financial analyst by profession with extensive experience in investment reseacrh and stock market analysis. I am currently a published author at Seeking Alpha, and a writer at Quantshare.Com, a trading software company.

© 2014 Copyright Nicholas Maithya - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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