Vital Images' Target Bumped Up

Vital Images, Inc.'s (VTAL - Snapshot Report) software applies proprietary computer graphics and image processing technologies to a wide variety of data supplied by computed tomography (CT), magnetic resonance (MR), and positron emission tomography (PET) scanners.

After 2008, the distribution partnerships driven by the relationship with Toshiba are expected to resume making strong contributions and the company with the launch of ViTAL Enterprise is expected to win more direct enterprise deals.

The demand for its Vitrea 2/ViTALConnect software continues to increase as demonstrated by the growth in the installed base of customers. Further market penetration and higher sales are expected due to VTAL’s initiatives to broaden access to Vitrea among radiologists and cardiologists.

The company’s ability to generate a significant portion of its revenue and maintain high gross margins is at risk from its dependence on Toshiba. Thus, the loss of this contract can negatively impact earnings results.

Also, under the Deficit Reduction Act (DRA), the company has been experiencing a greater-than-expected negative impact. Earnings growth may be hindered by the growth in operating expenses.

At its current price of $12.90 per share, VTAL is trading at 3.0x our 2008 revenue estimate of $70 million, which is at a premium to the group multiple of 2.5x. The slowdown in the CT and IT/PACS markets and the greater-than-expected impact from the DRA have been negatively impacting results. We believe VTAL is appropriately valued at roughly a group premium of 3.2x 2008 revenue estimate. Our price target moves to $13.50.

Read the full analyst report on VTAL