China Medical Technologies: Two Steps Forward, One Step Back

Many investors have found that in this turbulent market, gains often come in the “two steps forward, one step back” variety.  Such is the case with China Medical Technologies, Inc., (CMED) over the past two weeks.  The company announced earnings August 4th after the close which sent the stock sprinting higher.  But a week later, on the 12th, management announced it would be issuing $150 million worth of convertible senior notes along with additional stock (or American Depository Receipts - ADS).  The news sent the stock tumbling back down and after the deal was priced at $48.00 the stock continued to trade lower Wednesday.<o :p=""></o>

Leafing through the earnings report it is easy to see why the stock reacted positively.  Revenues were $33.1 million which represented a 49.7% increase over last year.  Net income came in at $16.1 million or 57 cents per ADS which was good for a 61.2% increase.  In addition to stronger sales numbers, the company saw sharply higher margins as a result of transition in revenue mix.  Previously the company had concentrated on selling medical equipment.  But now that the installed base of equipment is largely in place, management has intentionally transitioned to focusing on sales of consumable reagents used in this equipment.  The result is higher margin products and a more predictable revenue stream.