To boost its anemic growth, Sonic Innovations, Inc. (SNCI) has once again adopted an acquisition strategy. The emphasis in research and development has resulted in new product launches that are helping to drive sales by double digits. The company also expects to find additional growth from improvements to its distribution.
The company finally gave up on its diagnostic business Tympany and the referral concept and instead has expanded its distribution relationships. The sale of the auditory testing division has helped Sonic clear a path to meaningful earnings growth. The company is also in the process of cutting operating costs from consolidating European operations. These cost reduction efforts are expected to help the company reach its EPS guidance.
At its current price of $2.95 per share, SNCI is trading at 0.6x our 2008 revenue estimate of $140 million, which is at a discount to the average group multiple of roughly 1.1x. The weak economy continues to negatively impact North American sales.
However, we believe the focus on profitability and expected improvements this year and stronger expected growth thereafter should drive the stock to trade at a premium to the group. Our price target moves to $6 and is based on a price-to-sales multiple of roughly 1.2x FY08 sales estimate.
Read the full analyst report on SNCI
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