ROCM's Future Earnings

I saw a blog post by Rocco Fenton on Seeking Alpha (http://seekingalpha.com/article/54810-rochester-medical-facts-and-emotions-collide?source=yahoo), and while I enjoyed the post, I was struck by the writer's analysis of a "fair value" for ROCM. He built a future earnings model for 2008 and 2009 and came up with $0.38 EPS in 2008 and $0.58 EPS for 2009.

While I would dispute some of Mr. Fenton's numbers (I think they are a little low), I am willing to accept his numbers for the purposes of discussion about what is a fair value for ROCM. He derived his revenue numbers outlook based on an 8% quarter over quarter growth estimate, which gives the company an annualized revenue growth rate of 36% for 2008.

So the question is what should the market pay for 36% yearly growth, accelerated earnings growth, new major contracts coming on line, a huge quarterly gross margin range of 50-55%, no debt, significant cash and equivalents on hand, and the potential of a lawsuit settlement with Covidien?

Well, right now, the market is giving ROCM a forward 2008 P/E of just over 30. Rocco Fenton seems to be focused on the past for a valuation estimate. He won't pay more than 30 times trailing earnings. Sorry, but this is a growth stock, not an insurance company. Looking at trailing earnings with growth stocks is looking out the rear view mirror - you miss the move.

Growth stocks with solid outlooks and solid fundamentals usually command 2 times growth and investors are now looking at 2008 earnings to determine this fair value. Let's discount this to 1 times the growth (this is a Micro Cap) and we are talking about a fair value of $36.

The market is just not paying attention and Rocco is a value investor trying to make sense of a growth stock.