Wednesday, June 11, 1997

Sabratek Corp.
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Phone: 847-647-2760
Price (6/11/97): $31

HOW DID IT DOUBLE?

Sabratek came public in June of 1996 at around $11 per share. The prospects for the company's revolutionary "virtual hospital room" concept have driven the share price sharply higher.

Sabratek had been a money loser since its inception in 1989. However, the first quarterly report as a nascent public company was remarkable for the narrowed losses and improved sales. Since then, the company has enjoyed three straight profitable quarters with sequential earnings gains of 25% and 120% over the past two quarters. The most recent quarterly results smashed estimates handily.

On top of that financial performance, Sabratek has landed some big contracts from Omnicare and the Cleveland Clinic. The combination of an intriguing new approach to home intravenous infusion and impressive earnings performance led to this Double.

BUSINESS DESCRIPTION

Sabratek competes in the highly competitive market for medical products for home intravenous (IV) infusion. There are some big players in this market, including Abbott Laboratories and Baxter International. Sabratek competes with an edge -- it has designed infusion pumps that are programmable via modem. This allows doctors and home health nurses to adjust prescriptions by phone, eliminating the need to make as many home visits.

The company is also developing devices that will allow measurement of vital signs via modem. It is the stated goal of the company to create a "virtual hospital room," which will lead to more efficient and complete home healthcare. The key to this capability is the proprietary MediView software sold by the company. This software can handle up to 35 patients at a time.

FINANCIAL FACTS

Income Statement

      12-month sales: $22.1 million
      12-month income: $1.9 million
      12-month EPS: $0.20
      Profit Margin: 8.5%
      Market Cap: $295.6 million

      Balance Sheet
      Cash: $6.4 million
      Current Assets: $28.8 million
      Current Liabilities: $5.1 million
      Long-term Debt: N/A

      Ratios
      Price-to-earnings: 155
      Price-to-sales: 13.4

COULD THIS DOUBLE HAVE BEEN PREDICTED?

There was a robust discussion of Sabratek's possibilities in the Motley Fool AOL healthcare forum last fall. This could have alerted a forward thinking fool. The landing of the Omnicare deal last fall was well before the latest doubling and should have been viewed as a significant source of revenues and a vote of confidence in Sabratek's product.

In March, there was a very positive article on the company in Investor's Business Daily, but the share price dropped in the stock sell off at the end of March. The price was as low as $17 3/4 in early April, giving investors another chance to hop on board. Since Sabratek was just becoming profitable, it would have taken a belief in the prospects of the company to have led an investor to buy the stock.

WHERE TO FROM HERE?

The recent estimate beating performance of the company bodes well for the future. Statistically, there is a high probability that the shares will sell for a higher price six months after beating estimates. The long-term growth of the company is estimated at 38% annually, and the company is expected to earn $0.86 per share in FY98. This leads to a YPEG valuation of $32 per share. The price/sales ratio (PSR) is a very generous 13.4, not a bargain by any criteria.

So, should this stock be a part of a Foolish "virtual portfolio"? While I see the merits of the company and have high hopes for its products, I don't see another double in the near future. The extremely high PSR puts this stock in the high-risk camp. A Foolish investor would do well to wait for another sell-off before hopping on board.

-Mark Weaver, MD ([email protected])

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