E-mail this article Printer-Friendly

Horatio and the dialysis machine — a small cap success story

This U.S. advisory reminds us that there are still optimistic stories to tell as it hands out its rags-to-riches award to a firm that got it right.

In these days of financial frustration, contested bonuses and general pessimism, it may be a good time to turn to Horatio Alger.

In America, that name stands for rags-to-riches. (There have certainly been Canadian Horatio Algers who have risen from humble circumstances, but their names don’t spring to mind — too modest, probably).

We mention this because one of America’s top experts on microcap stocks, Mr. Max Bowser, has just handed out his third annual Horatio Alger Award to a small company that has “picked itself up by its bootstraps.”

His choice is a 27-year-old company that is in the medical business. In an interview with its chairman in the latest issue of The Bowser Report, we discover how the company grew and how its stock rose from 50 cents to $26.50.

This is the story of a little company that could. It has all the classic elements — having a good idea, learning from one’s mistakes, building carefully and rewarding both employees and shareholders along the way.

Home dialysis machine

Some believe that Horatio Alger was an exemplary American who rose from the gutter to achieve wealth and fame.

In fact, he was a 19th century writer of dime novels (or boys’ stories) that pointed the way to success. Struggling against overwhelming odds, the hero lifts himself out of poverty and into a life of righteousness and respectability. Alger wrote more than 100 of these books. There is a foundation in Alexandria, Va., that keeps his name before the public and honours those who have overcome adversity.

Mr. Luke Schmieder did not emerge from the gutter (he emerged from Ohio State University, to be precise), but he and his colleagues have lifted Mesa Laboratories (NASDQ-MLAB) to a position of prominence in a very critical area of medical care.

In the early 1980s, Mr. Schmieder and Mr. Paul Duke, both of whom had worked with dialysis, set out with the idea of creating a home dialysis machine. “The home dialysis concept was not popular at the time,” he admits. “The concept has only become popular in the last couple of years.”

Mesa’s only unprofitable quarter came in its early days, when the partners were determined to make the entire dialysis machine. That was one of those mistakes successful businesses learn from.

Even now, the company does not make the machines. It makes the meters that verify the machine is operating correctly (and of course those with kidney failure can afford nothing less than perfect performance).

Never a bad acquisition

Once launched on the right track, the company grew carefully with a series of acquisitions. These began 20 years ago with the purchase of Datatrace, a high-precision data logging company.

That first pick-up was made with stock, but subsequent acquisitions have been made largely with cash, a healthy situation for a growing firm.

None of the acquisitions is superfluous to Mesa’s business. Each contributes to improved dialysis treatment — flow meters for cleanliness and resistance to corrosives, special sterilization processes and so on.

Thus Mr. Schmieder can say without hesitation: “We’ve never had a bad acquisition.”

But while this process of growth has increased Mesa’s revenues steadily over the years, that’s not enough, in the chairman’s opinion.

No short changing

“Revenue growth doesn’t do the company or the stockholders any good unless it leads to profit,” Mr. Schmieder recently told the shareholders.

While big companies can dress up their earnings (or could, in better days) to stimulate the share price, small firms have to be more prudent.

They have to make sure that profits provide solid backing for the share price without any accounting sleight of hand. Nor can they have more shares outstanding than the company’s revenues can support.

At the same time, the company doesn’t want to short-change its shareholders, or its employees.

Mr. Schmieder explains Mesa’s approach.

“We have a program in which our employees get stock options. They’re modest compared to some of the sums we hear about on Wall Street. But, to stabilize our stock price, profits play a key role. However, the number of shares outstanding also plays a role. As a result, we not only think of our shareholders in general, but our employees specifically.”

This careful balancing act between shares issued and profits earned also makes room for dividends. About one-third of the company’s earnings go into dividends, which are now 10¢ a share.

And there have been several special dividends when the firm was accumulating too much cash. Not a bad sign in itself.

It was 21 years ago when the stock hit its low of 50¢. It hit its high of $26.50 in 2008 and in the midst of this bleak market, currently trades at a respectable $17.25.

This is just one story of a company that has built itself up patiently and intelligently, knowing its market and sticking to what it does best. And if the economy has gone from riches to rags, maybe we should pay more attention to the people who have shown how to go the other way.