Many an investor has been lured into investing in businesses with sexy stories; those on the cusp of greatness with the next breakthrough technology, or 'game changing' product.
Sadly, most fail to deliver on expectations, for a variety of reasons, though can string investors along for many years through assurances that success is just around the corner. These are the 'gunna' companies; those that are forever 'gunna' be successful, though never are.
However, there are exceptions, and those businesses that do achieve success can deliver shareholders a substantial reward.
A 'gunna' company?
Medical imaging company Promedicus (ASX: PME), although a profitable business, certainly seems to be at risk of being labelled a 'gunna' company. The profit it made last year was the second lowest on record, and its net profit has dropped by over 70% over the past decade. Today it claims to be on the threshold of cracking the giant US market, although similar claims were made ten years ago… Is it really sensible to claim that this time it's different?
On close inspection there is a lot to like about Promedicus (which is why I own shares). Though the business' earnings have been on the wane for the past ten years, the company today is quite different from that of a decade ago — or even during most of that decade. In recent years, Promedicus has undergone substantial structural change, having sold off a legacy business and bought into a new (and most promising) area.
And throughout it all, unlike many 'gunna' businesses, the company has remained debt free and has not sought extra money from shareholders. It's even managed to pay a dividend in most years. Growth may have thus far proven elusive, but it has avoided most of the pitfalls that befall most 'gunna' companies.
Why is it different this time?
Promedicus is in the business of providing software for the diagnostic imaging industry – an industry that is undergoing rapid expansion due to the increasing use of imaging technology (e.g. MRI scans), and also the substantial growth in the data load of modern medical images.
The recently acquired Visage business is well placed to capitalise on this trend, as it enables clients to manage and view detailed imagery over the internet in a manner that greatly reduces the bandwidth requirements.
Growth expectations here are not ungrounded, with some recent large contract wins in the lucrative US market — which had to progress through a rigorous tender process against some well entrenched and well-heeled competitors. These wins will not only underpin revenue for some time to come, but importantly they effectively promote the value and attractiveness of Promedicus' systems for its clients, and act as a meaningful foot-in-the-door to the US market.
As with the broader trend in software, the company's products are sold under a subscription model, which produces reliable, annual income for the business. Importantly, the products are rather 'sticky'; in other words, there are switching costs, both monetary and logistic, which means that when Promedicus wins a new customer, it tends to keep them for a while.
The most recent earnings season revealed a company whose revenues rose by 28%. With new contract wins making a full 12-month contribution in the current year, this can be expected to further increase. Importantly, with the business enjoying a relatively modest fixed cost base, and also high margins, any new sales should make a meaning contribution to the bottom line.
