For small- and mid-cap companies that have only a few analysts following their stock, an unequivocal endorsement by a major brokerage can make a huge difference.
That’s what happened with Los Angeles-based Diagnostic Products Corp., a maker of medical testing equipment that saw its shares take off after a recent “strong buy” recommendation was issued by Boston-based investment bank SG Cowen Securities Corp.
After SG Cowen initiated coverage of Diagnostic Products on Sept. 22 and gave the company’s stock the highest possible rating, the share price jumped 7.8 percent, closing that day at $50.13 a share, with trading volume on that day being four times the average level.
And it didn’t stop there. As of last week, Diagnostic Products’ shares had climbed to about $55 apiece, on still heavy volume, closing at $55.88 on Oct. 4.
The SG Cowen analyst who prepared the report on Diagnostic Products was not available for comment last week, but others were quick to point out the connection between the report and the price acceleration.
“There are not that many shares of the company outstanding to start with,” said one analyst who asked not be identified. “SG Cowen is an institutional firm, and when their clients buy shares, they buy large quantities, which is going to impact the price.”
Only two other equity research firms cover Diagnostic Products, which is essentially a small-cap company with a market capitalization that until recently was around $350 million. As a result, the company was not on the radar screen of large institutional investors until it was picked by SG Cowen last month.
Interest in the company has been driven by its new generation of medical testing equipment, known as the Immulite 2000 system. The highly automated system, which tests for anemia, diabetes and infectious diseases, among other things, and that can run up to 200 tests an hour, is much more powerful than previous testing devices and has proven to be in high demand with hospitals and clinics.
Moreover, the so-called “immunoassays” the kits needed to perform each individual test on the system are big moneymakers for the company.
“It’s the familiar razor and razorblade system,” said Michael Ziering, president and chief executive of Diagnostic Products. “The Immulite 2000 is just the equipment, but you can’t use other people’s assays on them, and that’s where we make our money because these (immunoassays) are the high-margin items.”
The recent run up of the company’s stock has not occurred in a vacuum. Since spring, the share price has been going up gradually, from around $22 in early April, when the company came out with a strong quarterly financial reports.
For the second quarter ended June 30, the company reported net income of $7.0 million (50 cents a share), compared to $5.5 million (40 cents) for the like quarter a year ago. Revenue was $63.7 million vs. $54.6 million.
The second-quarter earnings easily beat analysts’ consensus estimate of 42 cents a share. (Third-quarter results won’t be announced until later this month.)
“We’ve gotten some good momentum from our earnings,” said Ziering. “We beat expectations the last two quarters, and we got some very positive analyst reports.”
The success of the Immulite 2000 line has also allowed the company to make inroads into the domestic market for diagnostic instruments, as opposed to the European market, where the company has historically generated up to 78 percent of its total sales.
Diagnostic Products faces competition from heavy hitters, such as Roche Diagnostics, Abbott Laboratories, Bayer AG, Johnson & Johnson, and Pharmacia & Upjohn Inc. for the lucrative market of the biggest U.S. hospital groups and medical labs. Aside from price and ease of use, the main consideration that can give Diagnostic Products an advantage over the competition is having a more extensive menu of tests that can be performed on its instruments.
