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Tuesday, June 17, 1997
HEARx,
Ltd.
It takes two to speak the truth - one to speak and another to
hear. HOW DID IT FIND TROUBLE? Holders of HEARx stock were listening to all kinds of good news when the stock sat at $7 3/8 last July. George Soros had invested, new hearing centers were opening, new contracts were being signed, and some gurus were putting HEARx on their "superstocks" lists. The stock had run up from under $1 to over $7 in less than a year. It was music to the investor's ear. Then came discord in the form of column by Barron's writer Alan Abelson. The stock took a hit and has never recovered. What was it that the perpetual bear of "Bearons" iterated that wreaked such havoc on the stock? In a column on July 15, 1996, Abelson raised some questions about how investors were valuing the company. The details included tidbits like the fact that the company was selling for 30 times sales (market cap of $600 million with revenues of $11 million), that it had just lost a Humana contract that represented 20% of said revenue, and that some of the "name" investors had received sweetheart deals in the form of warrants worth 10x their investment in order to get the cachet of their names associated with the stock. It wasn't pretty. BUSINESS DESCRIPTION HEARx owns and operates hearing centers where customers can get hearing aids, audiologic evaluations, and products for the hearing impaired. These centers are open to the public, but the real cachet of the company is its focus on the managed care market. The move of Medicare patients to managed care has generated an opportunity for ancillary care providers. If the Medicare package includes audiologic services, it is a better product than a package without such services. HEARx is hoping to land a large number of such contracts, and this has been the primary focus of the company. FINANCIAL FACTS Income Statement 12-month sales: $19.4 million
12-month income: ($9.8 million)
12-month EPS: ($0.27)
Profit Margin: N/A
Market Cap: $124.4 million
Balance Sheet
Cash: $9.9 million
Current Assets: $24.9 million
Current Liabilities: $5.3 million
Long-term Debt: $0.19 million
Ratios
Price-to-earnings: N/A
Price-to-sales: 6.4
HOW COULD YOU HAVE SEEN IT COMING? Beyond the hype associated with the stock, there was clear evidence that the stock was overvalued. In discussions on the Fool's Healthcare Industry message board and on the HEARx message board (since closed) there was ample warning of the overvaluation of the company. The company was also printing shares like mad. Shares outstanding rose 64% last year, making dilution a huge problem. On top of this, insiders had been selling continually throughout the year. This company had its bubble burst by Barron's, and any investor could have heard it coming. WHERE TO FROM HERE? A Fool would not spend a lot of time with a penny stock like HEARx. In the interest of completeness of discourse, I will note that the Price/Sales ratio is a robust 6.4. The company has publicly announced that no profits are expected until 1998. Top this off with a warning that the AMEX has the right to review any low-priced money losing stock for potential delisting and you have a set up for further disappointment. If HEARx eventually tops $5 a share and is showing some profits, there will be plenty of time to participate in the well-hyped potential of the hearing disabled elderly population. In the meantime, holders of HEARx stock may well continue to act like Vincent Van Gogh and cut the EAR out of their portfolios. -Mark Weaver, MD ([email protected])
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