Deltex Medical-Optimal Growth Stock

Just posted this on the ten-bagger thread...



OK, I'm going to suggest Deltex Medical (DEMG). Currently at 18p to buy, with a market cap. of around £13 million. Though it seems that you can get it for less, given recent trades. To ten-bag it would need to get to 180p, and provided no extra shares are issued, that would equate to a market cap. of around £130m.

Now, I wouldn't recommend that anyone buys this share. Although I hold a fair amount, I've written the money off, because the situation seems hopeless. And currently I would be very happy if someone would take the company over for 25p. There hasn't been contract news for well over a year, Deltex have been banging on about their technology for years and years with little success, and worst of all their main customer is the NHS.

But... one can make a case for DEMG being a potential ten-bagger.

It's main product is CardioQ. This is a disposably, ultrasound probe, put into the throat, connected to a monitor. It is used during surgery, and monitors fluid levels. The anaesthetist, by responding to the monitor's read-out, can optimise fluid level, which in turn will hasten recovery. Which means that patients can leave hospital earlier, in a healthier state. Dozens of studies have confirmed CardioQ's value, and if it was universally used in the NHS could save literally hundreds of millions of pounds. (Off the top of my head each probe costs £50-£60).

Although there is clinical demand in the NHS for CardioQ, of at least 250,000 probes a year, a small fraction of this amount is being ordered. Which means that Deltex is not achieving its potential... its turnover is around £3 million pounds a year, and it's still making a loss. The NHS just don't seem particuarly interested - managers don't seem to be able to conceive of the concept of spending a bit of money to save a lot of money. However the research evidence is building up, and NICE have CardioQ as an approved procedure. IF the dam breaks, and the NHS get their act together, the situation could turn around very quickly. In crude terms, if clinical demand were met, that might equate to a turnover of around £15m, and maybe a profit of £7.5m, assuming a 50% margin. Give that a PE of 20, and you've ten-bagged.

Even if the NHS isn't interested, there is a possibility that CardioQ could take off in the US. There has been interest in the US, and a few sales there. Deltex has applied for CardioQ to be given Category I status by 'The Centers for Medicare and Medicaid Services' (CMS) - which would entitle users to reimbursement. Currently CardioQ has Category II status, which is for products that are experimental. Given recent research, this would appear to no longer be the case.

However this is all potential, and as I've said, at the moment the take-up of CardioQ is disappointing. I would suggest that at the moment it is a bad idea to buy shares in Deltex, because the company seems to be advancing at a very slow rate. Nonetheless, Deltex reckon they can achieve profitability without a further placing, and they do have a turnover - so they're not completely blue sky. So perhaps one should watch the newsflow, and wait for a good-sized contract before committing funds. There should be a trading update in the next few weeks. I've no idea what this will bring, and for all I know it could be a profit warning that would send the shares to 10p or lower. Also, watch for news from the US - a decision about Category I status will, I believe, be announced in March, and finalised in June. If the decision goes Deltex's ways, this could be the catalsyt to multibaggerdom. A breakthrough with the NHS, and in the US, could eventually make a Deltex a twenty-bagger, but let's get real...