Is Nanosonics Ltd. still a buy after today’s big jump?

Nanosonics Ltd. (ASX:NAN) rallied today on strong quarterly sales but further upside is more dependent on the Australian dollar staying down than on penetration rates.

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If you are wondering if you have missed the boat on Nanasonics Ltd. (ASX: NAN) after its big jump today, then the answer really lies on your view of the exchange rate.

The medical device maker’s share price rallied around 6% to $1.335 ahead of the market close after management reported a better-than-expected sales figure of $8.3 million for the December quarter, or nearly 19% ahead of my forecast.

While management doesn’t report unit sales of its unique ultrasound probe disinfection device, it is clear that Nanosonics sold more than the 883 units I was expecting. I estimate that the company may have sold around 940 units instead, with 81% of these units sold in the United States.

That will give the market confidence about the penetration rate for these devices, called the Trophon ERP.

Hospitals and medical facilities currently disinfect inter-cavity ultrasound probes manually with harsh chemicals. This method is more expensive, is not as effective and is one of the leading sources of in-hospital infections.

However, the increase in sales volume for the Trophon would only bolster my discount cash flow (DCF) based price target on Nanosonics to $1.40 from $1.20 a share.

It isn’t easy estimating the average exchange rate achieved as management hedges the currency for 50% to 70% of expected sales. But my initial assumption of US93.5 cents that was made when the Australian dollar was well ahead of the US77.8 cents currently, was obviously too high. The average exchange rate achieved in the December quarter was about US83 cents.

If I were to use this rate as my long-term assumption (just to be conservative), my price target on Nanosonics would jump to $1.70 a share.

This makes Nanosonics a “buy” in my books as investors are not paying for the potential of Nanosonics applying the Trophon technology to other medical applications.

There aren’t that many happy stories in the emerging life sciences sector and it is good to see Nanosonics living up to management’s promises.

If sales momentum is sustained, as I am expecting, Nanosonics would likely be in a position to pay a maiden dividend in 2015-16 (barring an acquisition or unexpected and large capital expenditure program).

The stock is up 45.6% over the past 12 months compared with the 24.8% gain by the S&P/ASX 200 Health Care Index.

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Motley Fool contributor Brendon Lau does not own shares in Nanosonics.

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