Today’s Economic Events:
Initial claims
empire manufacturing
PPI
Philly Fed- reflation in global capital markets.

ECB increased margin calls on European banks by EUR163M this week to another record high. Is that perhaps the reason for the Gold sell off as Central Banks liquidate Gold to cover margin calls?

Apple has a larger market capitalization ($542 B), than the entire US retail sector. GO FIGURE!! Apples chart glance looks like a Roller Coaster ride that is going to the Moon. P A R A B O L I C. Apple was added to MS best idea list today because of media tablet 2012 increased projections.

By: Greg Zimny

50 DMA ($479.93), 100 DMA ($435.37), 200 DMA ($415.69).

Support 1: $575.18 Support 2: $550.04

Apple is now bigger than the entire US retail sector with market capitalization (at $542 billion and counting). Apple was added to MS best idea list today because media tablet shipments outpace fourth quarter targets. Also, Morgan Stanley increases Apple stock price target to $720. iPad3 goes on sale in the U.S. and nine other countries this Friday at 8 a.m. local time, Apple announces on Wednesday. Also, their is a rumor that Apple will launch 15″ MacBook Air this April.

Interesting Apple data:
25B iOS apps downloaded worldwide.
15.5M ipads sold in Q4 2011.
$400 reduced starting price for iPad3

By: Greg Zimny

JPM rocketed higher by 7% after raising its dividend 20% and plans to buy back $15 billion in a share repurchase plan. The banking sector is looking very strong and there should be lots of continuation in these names. The ^VIX fluctuated from a low of $14 to a high of $16. It closed at $14.80. Generally large fluctuations signal that a huge move is coming and I think we saw that today. The SPY is looking extremely bullish and until the market breaks down, the trend is your friend. The last time the DOW was at 13,177 was in 2007 before the credit crisis. Volatility could continue to stay depressed for a long time, but I believe it is very risky to be short volatility with the ^VIX at $15.

Written by Cam Patrick
@Cam_Patrick

Atrion Corporation

Atrion is a medical device and components manufacturer focusing on the fluid delivery, cardiovascular, and ophthalmology markets. They are headquartered in Texas with manufacturing facilities in Texas, Alabama, and Florida.

Product Lines

Cardiovascular Products

Atrion’s main products include technology that allows essential fluids and medications to be delivered to the heart during open heart surgery. These allow surgeons the flexibility to deliver the necessary fluids to the patient.

Atrion also manufactures a myriad of other products such as relief valves, aortic punches, and other products used in minimally invasive surgeries.
Fluid Delivery Products

Atrion manufactures a wide variety of one-way valves used for fluid delivery for drug delivery, catheterization, and other medical uses.

They are also a leading manufacturer of fluid delivery tubing and medical tubing clamps used in complex therapy procedures such as anesthesia, intravenous feeding, and cancer therapy.

Ophthalmic Products

Atrion is a leading manufacturer of soft contact lenses cases. They also have a proprietary market leading balloon catheter, which has been approved by the FDA, used to treat blockages of the tear duct.

Marine & Aviation Components

Atrion also has a non-medical division that manufactures inflation systems used in the marine and aviation industries.

Examples include inflation devices, oral inflation tubes, valves, and closures for life vests, life boats, survival equipment, and many other uses.

Revenue Breakdown by Product Line

Product Line               2011 Sales(m)                  2011 % Sales

Fluid Delivery                  $45,274                              38.5%
Cardiovascular               $34,072                              28.9%
Ophthalmic                      $19,581                             16.6%
Marine & Aviation            $18,777                             16.0%

Balance Sheet

Atrion has a rock solid balance sheet. The company has zero debt. Atrion also had $44.9 million dollars of cash at the end of December, 2011 which is an increase from $21.4 at the end of 2010.

Since the onset of the financial crisis in 2007-2008, a healthy balance sheet is even more important today. Even now in early 2012, while the economy seems to be improving and the market is rising, we are still dealing with high unemployment. A company with no debt is well prepared to weather any downturn in the economy or future financial calamity.

In the small-cap investing world it is even more important. Many small companies are highly levered as they are in the growth stage of their life cycle. Atrion is solid and steady.

Growth

While Atrion isn’t a high flying technology company that is growing 30% a year, it isn’t a stodgy beaten down name either.

Atrion has steadily grown revenues about 10% per year since 2006. This is very comforting given that we have seen one of the worst recessions since the Great Depression. Even at the peak of the financial crisis, Atrion grew revenues 8.3% in 2008 and 5.0% in 2009.

This is an impressive feat and gives you confidence that the company will only accelerate their revenue growth over the next few years as the economy improves. We saw revenue growth start to accelerate again in 2010 with a 7.9% increase followed by another 8.4% increase during 2011.

Atrion Revenue Growth

Year Revenue

2005       $ 72,089

2006        $ 81,020

2007        $ 88,540

2008        $ 95,895

2009        $100,643

2010        $108,569

2011        $117,704

Earnings, Earnings, Earnings

At the end of the day it is all about earnings. This is where Atrion shines. From 2005 to 2011, Atrion has increased it’s earnings per share from $4.66 to $12.82. This is a 175% increase in just seven years.

This is pretty impressive growth. The company has been able to scale their business and bring in an increasing amount of variable margin. While sales have increased 63%, in the same period earnings increased 175%.

This is happening because of expanding their sales over their fixed cost base as evidenced by their gross profit margins expanding from 40% to 51% during this time frame. This also shows good cost containment and management of expenditures by management.
 

Atrion Earnings Growth                          Atrion Operating Margin Growth

Year EPS                                                  Year Margins

2005 $4.66                                                  2005 40.2%

2006 $5.51                                                  2006 40.0%

2007 $7.06                                                  2007 42.7%

2008 $7.82                                                  2008 44.4%

2009 $8.36                                                  2009 45.0%

2010 $10.32                                                2010 46.9%

2011 $12.82                                                2011 51.0%

Dividends

Companies that pay dividends often times out-perform the market. Historically dividend returns have made up a good chuck of the market’s return. While you like to see a company reinvest earnings to grow future earnings, it is also a good sign when they are confident enough about their business that they return money to shareholders via dividends.

Atrion has a solid history of paying dividends. As you would expect, since the company is still growing, it isn’t a high yielding stock, however, it does pay a nice dividend. The dividend has increased from $0.62 per share in 2005 to $1.82 per share in 2011. This is a 193% increase in seven years.

This is nice to see as an investor. The dividend has been increasing at larger rates in the past couple years. I would expect this trend to continue as earnings accelerate out of the recession.

Management has also shown in 2010 that they have the propensity to return cash to shareholders above and bey
ond the normal dividend. Twice during 2010, the board declared a special on-time dividend to shareholders. In January 2010 Atrion paid a special $6.00 dividend and then another in December 2010 of $3.00 per share. I would continue to expect to see further special dividends if the company does not have any large capital expenditures to fund.

These future dividends will enhance Atrion’s return going forward.

Management

The management team at Atrion is solid. Emile Battat just recently stepped down from running the day to day operations but remains as Chairman of the Board of Directors.

The reigns of the company were passed to his son, David Battat who is the current President & COO. While a red flag usually goes up when you see things passed on in the family, you have to have confidence in the independence of the Board of Directors that it is in the best interests of shareholders.

David has been with the company through the terrific increase in revenues and expansion of earnings, margins, and dividends. While a small risk, it appears that he is well qualified for the position.

Emile Battat owns 10.3% of the shares outstanding. You like to see management with skin in the game and with a large stake like that, the Board of Directors will act to enhance the value of the stock for all shareholders because they will benefit right along with you.

Conclusion

Based on a conservative assumption of 10% revenue growth, margins of 50%, and a P/E ratio of 19, I can see ATRI getting to $390 per share in five years. Add in approximately another $10-$12 in regular dividends and the possibility of special dividends, the total return could approach the equivalent of $425 per share.

Even if we have another recession and these targets are not met, it is hard to see how ATRI doesn’t get to at least $300 per share plus dividends over the next five years. I truly believe the downside is extremely limited over a five year time horizon.

Opportunity

In a previous article I quoted Arne Alsin who always says that there are two types of companies: Those that have problems and those that are going to have problems. Atrion had this moment in their 4th quarter earnings release in February.

They noted that a major customer in their ophthalmic division determined that they had a significant inventory problem and needs to work down their inventory. They had been building safety stock in order to ensure customer deliveries and notified Atrion that they now need to work down this inventory during 2012.

Due to this Atrion expects that income could decline around 10% for the year 2012 with most of the effect happening in the first two quarters of the year. To quote:

“While this would mean an interruption of our 13 year history of annual growth in EPS, we wish to emphasize that we believe our business has never been as solidly anchored as it is now and we expect a return to our double-digit growth pattern in 2013.”

This customer is in a part of the business that is only around 16% of the business. The fluid delivery and cardiovascular divisions are still growing nicely. This looks to be a one-off occurrence of uneven sales to one customer.

The stock got knocked down from over $250 per share down to a little below $210. It is currently trading at $209 per share.

I would initiate about a 25% position in ATRI here. I would add again around $195. It can be a thinly traded stock at times and I have seen it move $5 – $10 over a couple of days. If you get the opportunity to purchase the stock around $175 per share, I would back up the truck.

Since management has told you that the first two quarters will be the worst as far as the earnings declines are concerned, I would use these next several months to keep ATRI on your radar screen and see if you can pick it up on the cheap.

FULL DISCLOSURE: I am long ATRI and have been for years. It is my largest position. I plan on holding ATRI for many years.

Given the 0.5% daily moves the markets have been making I believe the Cash VIX will be at 11$ in the near future. EUR/USD has once again decoupled from broader market “risk-on.” The last few days, credit markets popped higher at the open and have then sold off considerably – diverging negatively from European/US stocks into the close. ES is trading at the highs of the session up 10.25 pts or at 1377. Crude Oil is near its daily highs (107.21) as algorithms await FOMC announcements.

On the other hand, Apple is up 10.35 pts or (1.9%) at $562.58 or a NEW ALL TIME HIGH!! Apple has had a 52wk low of $310.50.
iPad 3 concerns are overblown.
iPhone5 launch in Q3.
apple tv as growth catalyst.
INVESTORS AWAIT FOMC MINUTES AT NOON! LISTEN CLOSELY FOR THE WORD, INFLATION,INFLATION,INFLATION….

Also, investors will keep a close eye on the steepness of the VIX Yield Curve and not so much the deceiving, low, front month prices. Monday, was NYSE lowest volume trading day of the year ( YTD, down 25% below daily average). Also, Treasuries rallied yesterday into the close as Crude and Silver lost over 1.5%. However, in the morning session today, ES is up 7 pts or (0.51%) at 1373 and Crude Oil is higher by $0.50 at $106.84. EUR/USD is at its session lows trading around $1.3087. Is RISK BACK ON?

ECON EVENTS:

FOMC Meeting: We expect no change, in line with consensus. Will Ben mention the word inflation?
BoJ Meeting: more asset purchases to come>
Mexico IP (Jan): Analysts are forecasting 2.5% number
US Retail Sales (Feb): Retail sales should show a positive increase in February, given strong auto sales, and user-friendly weather.

APPL closed on the highs of the day at $552.50 and was up 1.35%. Some notable movers today were Tudou Holdings (TUDO) and Yoku Inc. (YOKU). YOKU announced today that it plans to acquire TUDO to create China’s largest video sharing website. TUDO jumped over 150% to close at $39.41 after closing in the mid $15’s on last Friday. The street reacted well to the news and bid up shares of Yoku by over 30%. I learned after the fact, but there was very bullish option activity in Yoku last Friday. Did someone know about the merger? There is no doubt in my mind that SOMEONE did, but once someone makes a trade, it is public information for everyone. You just have to know where to look. This is another reason why Andrew’s unusual option activity reports can be a vital tool for trading. YOKU provided some great intraday trading opportunities on the short and long side. The shares plunged from $31 to $28 in the first 2 hours of trading. YOKU found buyers willing to support it at $27.80 and once this was established, the stock never turned back. It ended up taking out the morning highs to close at $31.85. The CBOE ^Vix closed under $16 today at $15.90. Despite the recent spike we saw in volatility last week from the selloff, it appears that volatility is in a downtrend. It is really important that investors and traders don’t get complacent in this tape because one news headline could change this market around in a flash. I really like the TVIX down here in this $14 area. I think it is a good risk/reward given that the ^Vix is under $16. I would personally start a position here, and then cost average down every .50 decrease on the ^Vix. Normally, I would never cost average down anything for a trade, but volatility can never go to zero and it has extreme ranges. I think we are getting near an extreme ^Vix range on the downside. I would be very comfortable holding a long TVIX position with the ^Vix in a $14-$16 range. The 52 week low on the TVIX is $13.80. Spot Crude, Gold, Silver and Copper were all down -0.83%, -0.75%, -1.9% and -0.34% respectively.

Written by Cam Patrick
@Cam_Patrick