Tuesday, May 6, 1997

Criticare Systems Inc.
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Phone: 414-798-8282
Price (5/6/97): $5 1/4

HOW DID IT DOUBLE?

Criticare Systems had been languishing for the past few years until December of 1996 when the stock really took off. There is little mystery behind this double. The stock took off the day the FDA approved a new monitoring system developed by Criticare.

This system, known as the MPT system, has the ability to monitor heart rate, blood pressure, the oxygen content of the blood, and the electrocardiogram while the patient is ambulatory in the hospital. This system increases the possibility for a patient to be moved out of intensive care unit more quickly, which can generate cost savings. Additionally, the company has entered agreements with IVAC/IMED to incorporate some of its technology into their IV systems.

The prospects for the success of Criticare's new technology moved the stock out of intensive care and returned it to good health!

BUSINESS DESCRIPTION

Criticare Systems is in the monitoring business. It makes all types of monitors, including monitors of oxygen saturation, EKG, respiratory system, temperature, blood pressure, and fetal heart tones to name a few. These systems are used in intensive care units, operating rooms and on cardiac care units. 50% of sales are international.

The company prides itself on making products that will lower medical costs and potentially shorten hospital stays. The MPT system was designed with this goal in mind.

The MPT system may also help save the company. Criticare was up against stiff competition from big players like Hewlett-Packard in the monitoring equipment area. Sales growth had been less than 10% annually since 1992. Earnings have been in negative numbers over the past year.

FINANCIAL FACTS

Income Statement

      12-month sales: $26.7 million
      12-month income: ($2.9 million)*
      12-month EPS: ($0.41)*
      Profit Margin: N/A
      Market Cap: $37.6 million
      (Excludes extraordinary gain of $569,946
       -- or $0.08 per share -- for debt
      conversion)

      Balance Sheet*
      Cash: $0.234 million
      Current Assets: $16.9 million
      Current Liabilities: $6.6 million
      Long-term Debt: $4.6 million
      (*As of Dec. 31, 1996)

      Ratios
      Price-to-earnings: N/A
      Price-to-sales: 1.4

HOW COULD YOU HAVE FOUND THIS DOUBLE?

This double came out of nowhere. The company has not been in the press, and there was not a lot of fanfare accompanying the new product release. The vagaries of anticipating FDA approval are nothing to base buying decisions on. The only way an investor could have foreseen and profited from this stock would have been to know the company well or to have actually seen the product in action. Financially, the stock looked weak and there were no earnings estimates available. It would have taken more a stroke of luck than a stroke of genius to have found Criticare.

WHERE TO FROM HERE?

There are no earnings estimates on Criticare so we are left to our own devices to value this stock. The company has announced orders for the new MPT system, including some international orders. The price/sales ratio of 1.4 seems reasonably low given the sales potential of Criticare's new products. I would certainly expect decent margins out of this type of product. Additionally, the price/research ratio (based on Market Cap divided by annual R&D expenditures) is 15 or so, this is at the upper limit of the acceptable range.

There could be money to be made in these shares, but a Foolish holding this is not. The company burns cash; it isn't yet profitable; it is up against formidable competitors; and the new MPT system has not yet been placed in a significant number of hospitals. On top of this, these systems must be sold to cash-strapped hospitals. This Fool would have to see some positive numbers on the bottom line of the earnings report before any increase in heart rate will be detected on my heart monitor.

-Mark Weaver, MD ([email protected])

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