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March 28, 2006
Watch List Update - Arrhythmia Research Technology

Two sessions after we selected HRT for the Wish List shares hit a low of $8.60 a share.  A day later shares closed at $12.25 a share. This surge in share price was in reaction to HRT’s agreement with IDEXX Laboratories. 

Stock price movements aside, two things must happen during the company’s upcoming earnings report for us to reconsider selecting the stock at current trading prices.

1) HRT must produce strong cash from operations. A large amount of retooling took place in 3Q05 and this deferred some cash flows to 4Q05.  If the COF figure is not padded in 4Q05 this could mean trouble.   

2) Gross margins must stabilize. Although is may be wishful thinking to argue that margins will show a sequential improvement in 4Q05, any further decline (below say 30% gross) would be worrisome.

Ordinarily one quarter does not a company make.  However, after the acquisition of New England Molders in 2004 HRT has registered steady declines in margins/cash flows.  Another poor quarter would make us question if the company is capable of producing the type of attractive and consistent returns that it did when it focused solely on sensors (these points of interest were mapped out more thoroughly when we selected HRT for the Wish List ~
Dec 29, 05)

In short, and given what we know today, we believe that any investment in HRT should be made on share price weakness and/or after a greater understanding of cash flows/new agreements can be made.

As for the IDEXX deal, the company has not disclosed any further details on this agreement since January 4. Not surprisingly, HRT’s share price not closed above $12 a share since January 4.


Disclosure: No at or associated with FallStreet.com has any investment position in HRT.

 

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