Published: September 22, 2008

Kinetic Concepts (NYSE: KCI, $32.35) is a medical technology company specializing in systems designed for the treatment of deep wounds. Specifically, the company is a leading provider of vacuum-assisted closure (VAC) products, which apply pressure to the wound site, protect against infection, and promote much faster healing.

Because they can dramatically reduce recovery time, these products are popular with patients, doctors and insurance companies. And thanks to growing demand, the company has seen annual revenues double over the past five years -- climbing from $763 million in 2003 to $1.7 billion today.

While this success has invited some competition, Kinetic was the first to penetrate this market and currently enjoys a near-monopoly. Furthermore, it has locked up valuable patents that will help keep rivals at bay until late 2012 at the earliest.

And the company continues to scale new heights. Over the past six months, sales have advanced +15% to reach $882 million, led by growth of more than +25% in foreign markets. Meanwhile, adjusted earnings have jumped more than +20% to $1.92 per share. Better still, there are two key growth drivers on the horizon.

First, the company is expanding its presence overseas and planning to enter Japan and Germany within the next two years, both huge potential markets. In the meantime, management has just acquired LifeCell, a tissue regeneration specialist whose sales have quintupled over the past five years -- thanks to products that carry lofty gross margins above 70%.

This purchase will add some diversification to the firm's product portfolio and chip in over $200 million in annual revenues. And that total should ramp up significantly when pushed through Kinetic's international distribution channels -- the firm has a dedicated clinical sales force and has established working relationships with 9,000 hospitals in 18 countries, more than four times as many as LifeCell.

However, despite posting record first-half results and completing a major acquisition that could yield hundreds of millions in revenue synergies, the shares have fallen with the rest of the market. In fact, KCI is trading in the low $30s, off its October 2007 peak of $63.

That leaves the stock trading at just 6.3 times cash flows -- about half its long-term historic average and a sharp discount to the industry norm of 18.8. Based on a fair value of $53, the shares have promising upside potential of around +65%.

Kinetic's VAC products are currently used to treat over 1.7 million patients annually. But the firm has barely begun to crack many foreign markets. In fact, the company estimates there are roughly two million treatable wounds outside the U.S. every year, and global market penetration rates are still below 10%.

And aside from the developments mentioned above, it's also worth noting the firm has just signed a potentially lucrative marketing agreement with Dow component 3M (NYSE: MMM).

With all this in mind, I think the stock is an attractive idea at prices below $37 per share, which represents a hefty margin of safety with a healthy upside potential.

Nathan Slaughter
Editor
Half-Priced Stocks

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Nathan Slaughter has developed a long and successful track record over the years by investing primarily in deeply discounted securities. He uses advanced discounted cash flow techniques, along with a host of fundamental research, to uncover quality stocks that are trading well below their actual intrinsic value.

Nathan's previous experience includes a long tenure at AXA/Equitable Advisors, where he provided comprehensive investment advisory services to small businesses and high net-worth clients. He also honed his research skills at Morgan Keegan, where he performed asset allocation, retirement planning, and consultative portfolio management services.

Several years ago Nathan switched gears and decided to devote his time exclusively to financial analysis and writing. He has since published hundreds of articles for a variety of prominent online and print publications, and he now writes exclusively for StreetAuthority.com.

Nathan's educational background includes NASD series 6, 7, 63, & 65 certifications, as well as a degree in Finance/Investment Management. He currently resides in Shreveport, LA with wife Julie and sons Aidan and Riley. 

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