Cardiac Science is a long-term dud, to say the least, falling from a peak of 235 in 1993 by 98% over the past 16 years and by 96% since peaking at 98 in 2000. Based in Bothell, Washington, CSCX (3.22, $75mm market cap), this manufacturer of automated external defibrillators and cardiac monitoring equipment somehow managed to snag what appears to be a good CEO, and that is why I am interested.
I first learned of the company when a client asked me about it in August. The company had just resumed shipping its AEDs after a quality issue had led to a short-term halt in shipments. Management suggested that it might have to take a large charge to cover the expense to fix the problem. Two days ago, it did so, announcing an $18.5mm cash charge to cover a software upgrade for a problem that impacted 2 out of 300k installed units.
CSCX now has a tangible book value of $34mm after taking the charge to cover the workaround (cash charge) plus a big hit on the write-down of a tax deferred asset. My calculations indicate that the company will probably generate cash of about $8mm over the next year, with sales growing modestly due to new product offerings.
CEO Dave Marver, who joined the firm from Omega Advisors late last year as COO, took the helm as CEO in March. Marver has 14 years of experience as a fixer-upper at Medtronic (MDT). Unfortunately for him, he walked into a really bad situation. In addition to the recent quality issue, the company saw its distributor in Japan become a competitor. Marver, who bought 10k shares in May near 4, picked up options upon joining the firm and upon his promotion to CEO
I believe that the AED business is a growth business, while the balance is more of a cash cow. Marver will stimulate sales growth by launching new products over the next six months. Most recently, the company began distributing a device for Japanese company Omron, indicating the value of their distribution channel.
ZOLL Medical (ZOLL) trades at 1.1X trailing sales with a gross margin in the low 50% area. CSCX, with 48% GM, trades at just 0.5X. I think that CSCX can yield a 1X trailing sales valuation, which suggests to me a price in excess of 7 a year from now. Here is the history for the past 5 years:
I am betting that Marver can fix the problems that have long afflicted this company. It has no debt and sufficient cash, even after the recent charge. Tax-loss selling and mutual fund window-dressing are creating quite the opportunity here.
Disclosure: Long in an account I manage and long in the Top 20 Model Portfolio.
