Somanetics Corporation: Keeping track of blood oxygen, during surgery

The ability to closely monitor blood oxygen saturation levels is vital to the success of major surgery cases. Devices made by an outfit in Troy, Michigan allow for such monitoring in a non-invasive fashion.

Somanetics Corporation (NASDAQ: SMTS) is engaged in the development, manufacture, and marketing of medical devices. Its primary offering is the INVOS System, a non-invasive patient monitoring device that provides continuous information about changes in blood oxygen saturation levels in patients at risk for restricted blood flow. The INVOS System has applications in cardiac and carotid artery surgery, pediatric and neonatal ICU, and diabetic patient surgeries. The firm also develops and markets the CorRestore patch, for use in cardiac repair and reconstruction. The company has operations in North America, Europe, Africa, the Middle East and Japan.

The firm pleased investors last week, when it reported solid Q2 results and issued upside guidance for FY07 revenues. In discussing the favorable outlook the CEO cited recent data showing that use of the INVOS System in coronary artery bypass graft surgery cut major organ morbidity and mortality by 73%. It also significantly shortened ICU stays. The stock popped into the initial stage of a bullish "pennant" consolidation pattern on the news. Prices frequently exit pennants moving in the same direction they were traveling when they entered them. In this case, that would be to the upside.

Brokers recommend the issue with two "buys" and three "holds." Analysts see a 42% growth rate through the next year. The stock's Price to Book ratio (2.76), Sales Growth rate (23.4%), Operating Margin (23.58%), Net Profit Margin (35.83%), Return on Assets (17.91%), Return on Investment (18.35%) and Net Income per Employee ($138.7k) compare favorably with industry, sector and S&P 500 averages. Institutional investors hold about 57% of the outstanding shares. Over the past 52 weeks, SMTS has traded between $15.07 and $24.75. A stop-loss of $16.85 looks good here.

Larry Schutts is a contributing editor for Theflyonthewall.com and the Vice-President of Stockwinners.com.