We are initiating coverage of Angeion Corporation (ANGN) with an Outperform rating and a near-term price target of $6.00. The company has struggled to post positive net income since 2007 as a result of declines in revenue due to the conclusion of a major clinical research trial in 2008 and a significant slide in hospital capital expenditures in the weak economy.

Despite this, over the same period Angeion has generated positive free cash flow, increased gross margins, fortified their already strong balance sheet, tapped new market segments and rolled out several new products and product extensions. The company’s strong brand and service reputation, product breadth, international reach, customer base and healthy financial condition position it well for above market growth once hospitals begin to resume a more normal level of capital expenditures.

We believe revenue bottomed in 2009 and we look for sales growth to resume in 2010 as a result of contributions from new products and increased market penetration. We expect operating expenses to materially increase during the year due to increased investment in new product development and additional marketing initiatives. The net result will be operating expenses growing faster than revenues in 2010.

Capex will also increase during the year, turning free cash flow negative. However, the company’s large cash balance and healthy balance sheet afford it a significant amount of breathing room and allow it to wait out prolonged macro-economic weakness.     

We expect sales to accelerate faster than operating expenses beginning in early 2011. We believe 2011 will be the front-end of a significant resurgence in sales and earnings growth for Angeion as the company leverages its large prior year R&D/S&M spend and the economy experiences a more robust recovery.

Angeion’s stock is well off its high of $18.21 set in January 2007 and currently trades near where it did in 2008 when sales began to suffer as a result of hospital spending beginning to dry up. The current (03/08/2010) stock price of $3.90/share is only slightly higher than book value of $3.85/share with cash per share alone at $2.53 (book and cash figures at January 31, 2010).

We believe this is an excellent entry point for investors given the stock’s very attractive valuation and our belief that sales have already bottomed and are on the front-end of a rebound and positive net income will rematerialize in mid-to-late 2011.

First Quarter Financial Results…

Through the first quarter ending January 31, 2010 the company posted a net loss of $826k (-$0.20/share) on sales of $6.62 million, compared to a net loss of $622k (-$0.15) and sales of $6.43 million in same period 2009. Total sales growth of 2.9% was comprised of 3.9% growth in Equipment & Supplies revenue and a 4.2% contraction in Services revenue. International sales of $1.88 million grew 17.5% from $1.60 million the previous year and accounted for 28.4% of total sales versus 24.9% in Q1 2009.

Gross margin held relatively stable at 50.9% in the most recent quarter, down only very slightly from 51.3% in the year-earlier period. Operating expenses increased by $267k (up 6.8%) to 63% of revenue in Q1 2010 from $3.92 million or 61% of revenue in Q1 2009. While G&A expenses fell $52k (4.5%), S&M and R&D expenses grew by $144k (8.0%) and $252k (32%), respectively.

G&A expense fell despite a $50k increase in accruals related to an expected increase in bonus payments during 2010. The jump in both S&M and R&D expenses was not unexpected as management had previously indicated that additional marketing efforts and new development projects would require more resources.

Management has categorized these increased expenses as “investments” in the sense that we should expect to see some leverage in S&M and R&D once these new projects are commercialized and the incremental revenue growth outstrips the increase in operating expenses. We expect new products related to the increase in expenses to begin rolling out as early as the second quarter of this year.     

Domestic sales fell $96k (2%) year-over-year to $4.74 million and were down $312k (6%) sequentially. U.S. sales continue to be impacted by the effects of the weak economy and hospital budgets remaining very tight. While the economy as a whole has shown glimmers of improvement this has yet to translate into increased hospital capital expenditures. This is primarily affecting the MedGraphics business with a much more muted impact on New Leaf.  

Meanwhile international sales growth was impressive, up almost 18% year-over-year and nearly 21% sequentially. Angeion recently added new distribution partners in Canada and France which has accounted for some of the international sales growth. In addition, Angeion is beginning to gain further acceptance of their products in countries such as Japan, Australia and Brazil.

This, along with new product introductions and opportunistically taking some business from competitors, were the major reasons for the robust international sales growth in the quarter. Combined sales in Japan and Australia were $300k (16% of total international sales) in the most recent quarter, up almost 800% from Q1 2009.
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