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[QUOTE]Originally posted by raybond: [QB] Gurufocus says some nice things about fonar Growing By Acquisition Fonar's growth has come, and will continue to come from, expanding their MRI centers under management. This has happened mostly through acquisition. In 2013, HCMA used debt and equity to acquire a 50.5% stake in Health Diagnostic Management (HDM), which operates 14 facilities, expanding revenue by almost 25% in fiscal (June) 2013 and 40% for 2014. Another way Fonar can grow is to continue to consolidate HDM into the company, earning shareholders a larger piece of the profits of those 14 facilities. To this end, Fonar completed a $5 million deal in January to increase its stake to 60.4%. This will reduce the minority interest taken out of profits, balance sheet equity, and cash flows going forward. Other Things To Like Fonar has some other nice attributes, as well. For a tiny ($75 million) company, its competitive positioning is actually quite good. The firm holds numerous patents on the Upright MRI system, is not licensing them, has proven their effectiveness in the past, and has at least a decade of protection. The advantages of the Upright MRI vs. the traditional tunnel-style machine (and even newer open systems) are easily marketable, and indeed more aggressive marketing has driven a 9% increase in scans performed in the first 6 months of this fiscal year. Also, Fonar is financially a strong company. Debt from the HDM deal has been paid down rapidly, from nearly $16 million at the end of 2013 to under $10 million as of the last quarter. Fonar's monthly-fee management business is recurring and "sticky" (switching management providers would be enormously disruptive), driving very steady and reliable free cash flows at about 11% of sales. Over the medium term, this should allow Fonar to pursue its strategy of acquiring new centers and consolidating HDM without over-leveraging its balance sheet. Risks Before we get into any company risks, it is important to stress that Fonar is a micro-cap stock with very limited liquidity and wild price swings. Over the past year the stock has swung between $10 and $20! Only consider this one if you are ready for that, and be sure to use limit orders when entering or exiting the stock. Operationally, there are a few things to consider. First, despite being a first mover and holding valuable patents, Fonar is still a tiny company today, and its management team still consists of a group of long-timers, all but one of which is over the age of 76! That one, investment banker Ron Lehman (only 37), is behind much of the recent acquisition strategy, so perhaps we're seeing a step in the right direction. MRI machines are produced by some big-name industrials: General Electric, Siemens, Hitachi, Philips and Toshiba to name a few. All of these companies have far more R&D and marketing resources then Fonar. A newer development from one of these competitors could make Upright MRI less attractive then it is today. Also, new "Obamacare" rules have reduced reimbursement rates to MRI centers, which has slightly pressured the fees paid to HCMA. Further effects are not predictable but could continue to pressure management fees. Finally, Fonar's equipment business has been in a long-term decline. Machine sales have fallen from over $9 million in 2010 to under $2 million in 2014, although service fees have remained steady in the $10-11 million range. Further drops here will pressure margins, as this is a more profitable part of the business. On the bright side, trailing twelve month new equipment sales are up to $2.7 million, so this unit could be on the upswing, too. Conclusion Fonar is an attractive micro-cap. Unusually for such a small company, it has pretty reliable and recurring revenues, as well as decent competitive advantages, to go on top of a plausible growth strategy. The stock at $12.50 is in the bottom part of its 52-week range, 64% under its 52-week high. Assuming reasonable 6-7% growth going forward, and a 10% earnings yield, I see Fonar worth about $17.50/share - 40% upside from here. We'll add it as our newest Top Buy pick under the "Aggressive" portfolio. About the author: Magic Diligence GuruFocus - Stock Picks and Market Insight of Gurus [/QB][/QUOTE]
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