Medical device maker Nanosonics Ltd. (ASX: NAN) touched a record high on opening trade after delivering a maiden interim profit that was ahead of market expectations.
The developer of the Trophon ERP disinfection device for ultrasound probes opened 5% higher at $1.80 as investors cheered the 48% surge in first half revenue to $14.4 million and the sharp turnaround in earnings with a net profit of $1.2 million, compared with a loss of $3.5 million for the same period last year.
Management has delivered the profit in half the time I was expecting. My full year profit forecast was $1.3 million, although the beat was largely driven by "other revenue" that is mainly made by foreign exchange gains and reimbursements received from a distributor.
The key question is whether there is further upside for Nanosonics given that the stock has more than doubled in value over the past six months.
It is probably safe to say the current share price reflects the strong market adoption of Trophon with the company selling over 4,000 units in the United States. Based on my estimates, I am expecting the install base to hit 5,500 units by the end of this quarter and a little over 9,000 by the end of this calendar year.
A large install base is important because Nanosonics makes more money selling consumables.
If the current price is already factoring in the robust ramp-up in sales of the Trophon, is there a reason to still buy the stock?
Actually, there are three reasons. As I mentioned in my last article on Nanosonics, the falling Australian dollar is a key value driver for the stock.
Given the weak outlook for the Aussie with more potential interest rate cuts on the horizon and the Reserve Bank of Australia's desire to see our dollar fall to US75 cents, my discounted cash flow (DCF) valuation will jump to over $2 a share if I use a long-term exchange rate assumption of US80 cents.
The other reason to buy the stock applies to those with an investment horizon of more than 12 months. DCF-based valuations go up over time if earnings continue to grow as analysts rebase the present period earnings.
Currently, my base year is 2013-14 when Nanosonics posted an adjusted net loss of $4.2 million. As I roll forward my model (in August when the company hands in its 2014-15 accounts), the bottom line figure is expected to jump to around $4 million. The sharp increase in net profit for the base year will see a strong increase in the price target.
The third reason (and to me the least compelling) is the potential for Nanosonics to apply the technology to other medical and non-medical uses.
While this is a real growth avenue for the company, it's difficult to say if Nanosonics will be successful and how long that might take.
The stock pared gains in late morning trade and is up 0.6%, or 1 cent, at $1.725. I am hoping to see more profit taking as any price weakness would be a good buying opportunity.
