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Oh well. better late than never.

who is speaking to himself alone in this board.

Interpore's Bruised

By Rich Smith
February 12, 2004

Spinal implant manufacturer Interpore International (Nasdaq: BONZ) reported impressive results for 2003 on Tuesday -- then saw its stock price promptly crushed by the market.
Year-on-year revenues increased 20%. Income from operations more than doubled. And earnings per share more than tripled to $0.79 per share, diluted.

For the year, Interpore's "Minimally Invasive Surgery" (MIS) division -- which sells "devices used to deliver biocompatible materials into bony structures" -- saw only a 6% increase in revenues. But that growth exploded in the fourth quarter, increasing 22% over the year-ago figures.

Unfortunately, the MIS division's late-year success was outweighed by slower growth in other divisions and a decline in sales for its bone graft substitutes. Altogether, revenue grew more slowly in the fourth quarter than it did earlier in 2003, increasing only 14% over the year-ago numbers.

The lower revenues also hurt fourth-quarter margins. Operating margins dropped from 7% to 6%. Earnings per share were only $0.04 for the quarter -- down 50% from last year's Q4 (in part because last year's Q4 was boosted by a tax benefit), but still far below consensus estimates of at least $0.07.

Hence, the stock's bone-jarring fall of roughly 11% in Wednesday's trading.

But if Interpore is fundamentally healthy, it could heal a lot faster than expected. The company, for example, sports a return on assets, a return on equity, and a profit margin all in excess of 20%. It has $13.5 million in cash and equivalents, and because it's free cash flow positive, that number is growing at a fair clip. Moreover, it paid off its entire $6 million in long-term debt over the past year and now has no long-term debt on its books.

Interpore's enterprise value-to-free cash flow ratio is 18 (based on its most recent 10Q -- the 10K has not been posted yet and the company did not release a cash flow statement Tuesday). Analysts expect the company to increase earnings (which I use as a proxy for free cash flow) by about 20% per annum over the next five years. So the company's EV/FCF/growth rate is 0.9 -- or about half the ratio of the market as a whole.

My prognosis: I suspect Interpore's injuries are only skin-deep.

Interpore has received honorable mention -- albeit it has not yet proven itself worthy of an actual recommendation -- in Tom Gardner's Motley Fool Hidden Gems. Sign up for a 30-day free trial and share your views on the company on our exclusive Hidden Gems discussion boards.
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