Tuesday, November 29, 2005

Aspect Medical Systems (ASPM)

This stock has been upgraded by a number of brokers in the last several days as a result of the approval by the Japanese Ministry of Health of the marketing of its BIS XP monitoring system.

The company is recognized as the leader in brain monitoring technology and the ability to access the Japanese market as the second largest medical devices market in the world is a fabulous opportunity.

Little question that this is a great business, but can it be a great stock? The operating profitability has expanded in the most recent quarter to 11.5% versus 1.9% a year ago. Return on invested capital has escalated to 17% in the most recent quarter from last year’s levels of -3.6%.

Cash flow from operations for the year to date is below earnings. In fact, for the last ten quarters, CFFO has been less than earnings for every quarter but one. Free cash flow for the year to date is only $2.6 million, relative to a market capitalization of $820 million and enterprise value of $786 million.

EV/EBITDA for the TTM is 122 times! Wall Street is starting to use all too familiar “bubble” language in its effusive praise of this stock…

“We believe traditional metrics do not reflect the market upside potential for Aspect Medical.”

In my view, the Street has already anticipated a takeout based on Boston Scientific’s 28% position in ASPM. With median estimates of 0.59 for next year and median growth estimates of 40%, the 63 P/E seems to reflect a lot of hope.


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