American Medical Fairly Valued

American Medical Systems Holdings, Inc. (AMMD - Analyst Report) reported second-quarter revenue at the top of its prior guidance. EPS met the top range of guidance when excluding the royalty payment and normalizing for changes in interest expense. After adjusting for these factors, EPS still exceeded the analyst consensus.

Strong performance is attributed to solid expense management as a result of the numerous cost saving initiatives, legacy Men’s health products. Laser Therapy continues to be weak, declining 11 percent in the quarter. Women’s health continues to underperform expectations although incontinence revenues were strong with MiniArc driving growth.

New products like Miniaturo could stimulate the female continence business, but we believe the growth trend is still soft. The Miniaturo product carries the CE mark approval in Europe for urinary dysfunction. American Medical has developed a comprehensive plan to receive the Food and Drug Administration’s approval and expects marketing the product late 2010.

The management reiterated its 2008 guidance with revenues of $500-$520 million (up 7 percent -12 percent) and GAAP EPS of $0.57-$0.72, a fairly wide range. The company expects to leverage its revenue growth by improving GreenLight manufacturing and reducing marketing expenses. At the current price, American Medical Systems is trading at and 27x our 2008 EPS estimate of $0.60. We believe AMMD is fairly valued at the industry average 1.6x 2008 P/E/G or $18.75.

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