Why Somnomed Limited shares are climbing higher

While the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has continued its downward spiral this week, shares in little-known medical device company Somnomed Limited (ASX: SOM) have bucked the trend to climb 10% higher thanks to a well-received half-year update.

SomnoMed products, although not directly comparable to larger peers ResMed Inc. (CHESS) (ASX: RMD) and Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), do offer patients treatment for a range of sleeping disorders including obstructive sleep apnea.

Here are the key highlights from this week’s results announcement:

  • For the six months ending December, sales of SomnoDent devices increased by 30.3% to $18 million
  • Direct sales experienced strong growth as the company transitions to selling more through direct channels rather than via licensees
  • New products including the SomnoDent Fusion line achieved solid traction with customers
  • Management provided guidance that they “expect the third quarter to continue on this growth path, based on the trends we have seen during the first half”.

With a market capitalisation of just under $130 million, SomnoMed is a tiny company compared with the multi-billion dollar valuations of ResMed and Fisher & Paykel.

For the 12 months ending 30 June 2015 the group reported an adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of $870,000 –  a figure which some analysts choose to use as a proxy for cash flow.

While investors can already see the cash flow statement for the latest six months, they will have to wait until February to review the full financial details including EBITDA.

SomnoMed is certainly producing strong rates of growth and its outlook remains positive, however with the share price more a reflection of future expectations than current earnings, investors will need to satisfy themselves that the implied growth rates are achievable.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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