A lot can be learned from the behavior of Given Imaging Ltd.’s (Nasdaq: GIVN; TASE: GIVN) share.
In my opinion, Given Imaging’s capsule endoscope has temporarily reached the saturation point, with emphasis on “temporarily”. What happened to the company’s management is exactly the same thing that happened to the management of Cisco Systems Inc. (Nasdaq:CSCO) and JDS Uniphase Inc. (Nasdaq:JDSU) in 2000. They continued to believe that demand would continue to rise, so they accumulated inventories and increased marketing expenditures. 2005 and early 2006 was the time when the diagnostic medical world on Main Street took a timeout for reflection. If this timeout for reflection took two years in IT, we can expect more or less the same for Given Imaging.
Please note what happened to Given Imaging’s share since its peak in October 2004. Since then, it has yo-yoed with a steady downward tendency. This process often happens after peaks on Wall Street. Investors initially refuse to accept the reality, and hold onto hope, as they ask themselves how it’s possible that sales of this wonderful product, this capsule, are falling. They console themselves with the thought that the drop is ephemeral, and they buy the share at $35, and then at $30, only to finally despair and sell at $25.
Merrill Lynch reviewed Given Imaging and its products, after the company published its allegedly disappointing financial report for the first quarter of 2006. Merrill Lynch concluded that expectations had to fall, but that there was great potential for an increase in sales and insurance coverage. If I correctly understood their analysis and recommendation, it was “Wait, but monitor”.
CIBC more or less says the same thing. The analysts’ consensus, none of whom give Given Imaging a “Buy” recommendation, is earnings per share of $0.23. But I think that this consensus is unstable and is likely to fall towards $0.12 or even less. All the analysts believe that the company’s sales will begin to revive towards the end of the year, and that the company’s earnings per share will jump next year.
However, Given Imaging’s rate of growth will not recur; future growth will be slower. This has to taken as a fact: the company’s rate of growth will be in line with its rate of investment in marketing. It seems to me that the company’s profit margins won’t rise in the future as they did in the past.
Given Imaging will presumably return to profitability during the second half of 2006, and sales and profits will continue to grow over the next two to three years, albeit at a different rate from what we saw before 2004.
Economically speaking, Given Imaging’s share is still expensive in relation to the forecasts for both 2006 and 2007, but the share is falling, and it’s very hard to know where the balance lies. Speculators should bear in mind that Given Imaging may have another goose that lays golden eggs in the making: a capsule that sends pictures from the large intestine. We know that the company is trying to solve the problem of the large intestine. If it succeeds, nothing I wrote here will be relevant, because the share price will skyrocket.
Published by Globes [online], Israel business news - www.globes.co.il - on May 17, 2006
© Copyright of Globes Publisher Itonut (1983) Ltd. 2006