JONATHAN MORELAND
DIRECTOR OF RESEARCH
INSIDERINSIGHTS.COM

COMPANY: American Medical Systems
TICKER: AMMD (Nasdaq)
PRICE: $16.82
52 WEEK RANGE: $14.88-$24.40
MARKET CAPITALIZATION: $1.17 billion

Jonathan Moreland is a stock market analyst and runs InsiderInsights.com. Mr. Moreland spoke to Katharine Herrup of The New York Sun and explained why another merger for American Medical Systems should significantly boost their stock.

What does the company do?

They focus on pelvic health for men and women – prostate, erectile dysfunction.

Why do you like the stock?

They are an over $1 billion market cap company that has showed steady top and bottom annual growth for several years, and the stock has responded by basically doubling in price over the past three years. On a quarterly basis, the company has had a couple of disappointments that have made its stock come down sharply and has introduced good buying opportunities – one of them happened late last year and one is happening now.

Both disappointments stemmed from acquisitions that have led to expenses and earnings dilution. The stock has bounced back sharply from these acquisitions though. They bought Laserscope, which is a substantial acquisition for American Medical. Laserscope is in a similar niche, but focuses more on laser systems. The main attraction of Laserscope is its new Green-Light laser treatment, a well-considered treatment for benign prostatic hyperplasia. They paid a 45% premium for Laserscope. They had to fund this by selling some convertible notes, and management had to come out and say there was going to be some dilution to earnings. After an acquisition it is common to come down in price due to the integration of companies

Why do you think American Medical will do well after their recent acquisition?

Richard Emmitt who is a director of AMMD bought into the stock – $1.7 million worth – during the last downturn of the stock, and during this downturn he invested over $9 million. Mr. Emmitt is also a partner at the Vertical Group, a venture capital firm that focuses on biotechnology, and he bought the stock for the firm. I am going on the trading activity of experts in the field to gather some insight.

Vertical was a major owner of AMMD when it went public in late 2000.They held over 1.3 million shares as of April 2001. Vertical was heavy and smart owners of AMMD. From 2002 to 2004, they were selling their shares and making a profit on the stock going up. That was Vertical’s activity until late last year, but now they have started buying the stock back again during the plunge, and this time they have bought even more. They own almost as much of the stock as they did when AMMD went public.

Vertical is a smart group of investors who have traded this particular stock extremely well, and now they are buying heavily on a dip. My reading is that they obviously believe this acquisition will wind up being bullish for the stock, and the reaction to the acquisition has been overdone. I am happy to piggyback off their knowledge. I am not listening to what they are saying. I am looking at what they are doing, and they are buying heavily.

What do you think the stock is worth?

The stock has had pretty darn good multiples. It is still being priced at a premium, but given their past growth, I don’t think that is out of character for the stock, and it has shown that it can produce substantial revenue and growth.

What’s your forecast for the company?

The outlook for 2007 earnings is the stock is expected to increase again by 25%, and my bet is that earnings will continue to increase at least 20% or greater over the following couple of years after 2007.

Is it a good time to buy?

I think it is. It went from $23 to $16 – that’s quite a drop. This would be a good yearlong bet or so. JPMorgan just upped the stock to a buy.

What are the risks?

Integrating Laserscope is both a risk and a reward.