FONAR Stock: Investor Sentiment Seems To Have Finally Turned Bullish (NASDAQ:FONR)

Intro

We wrote about FONAR Corporation (NASDAQ:FONR) back in August of last year when we pointed to how the company’s significant balance sheet strength would ultimately result in share-price gains for the healthcare company. Although cash & shareholder equity numbers were growing meaningfully on Fonar’s balance sheet, shares at the time were testing underside technical uphold which is why we stamped a ‘Hold’ rating on the stock.

Thankfully, Fonar successfully tested underside uphold at that juncture and has only gone from strength to strength since then. As we see from the technical chart below, the company’s recent Q1 numbers for fiscal 2024 gave yet another catalyst for shares to pop higher. The difference this time however (with this latest spike to the upside) is that heavy resistance around the $19 level may have once and for all been dealt with. We state this because shares rallied to approximately $20 a share in the aftermath of Fonar’s Q1 numbers on really strong buying volume. Suffice it to say, given the potency of the stock’s recent rally, there is every opportunity that the $18.50 to $19 level should now act as strong underside uphold for the share price over time.

In Q1, net revenues reached $25.8 million which was an 11% enhance over the $23.2 million top-line number in the same quarter of 12 months prior. Net profit of $5.4 million doubled over a rolling quarter basis & increased by 145% sequentially. The convincing Q1 report means that cash flow from operations over a trailing twelve-month average now comes in at a very healthy $14.4 million. Therefore, considering that the company has no debt to speak of where its growing cash balance ($51.7 million) can easily confront capex commitments and ongoing share-repurchases, it becomes understandable why investors will maintain their interest in this play.

The significant buying volume print post-Fonar’s Q1 earnings announcement was a declaration that the pandemic-induced labor problems that engulfed this industry for quite some time over the past years may have finally come to an end. Yes, Fonar’s technical chart demonstrates that shares still have significant overhead resistance to punch through but it looks admire the worst may be over for this stock.

Value

With technical momentum finally on board, investors need to zone in on how cheap this company is and how profitable it is to boot. Given the company’s significant bottom-line growth in Q1, trailing GAAP earnings now come in at $11.4 million when we deduct minority interest. Dividing this number into the present market cap of the company gives us a GAAP trailing earnings multiple of 11.05.

Now when we invert this multiple, we get a trailing earnings yield of 9.05%. Although for example, Fonar does not pay out a dividend at present, its 9%+ earnings yield illustrates that it could pay out this sum (in the form of a dividend or special dividend) if it wanted to pay out all of its earnings in a given 12-month period to its shareholders. This is noteworthy because many of Fonar’s peers would not have the wherewithal to do something admire this. After all, many of them remain unprofitable from a GAAP earnings standpoint. Stereotaxis, Inc. (STXS) for example (which is a similar-sized company in the healthcare equipment industry), may have higher gross margins than Fonar but remains unprofitable from a GAAP earnings basis.

Return On Capital

Fonar’s ability to grow its earnings comes from the company’s prowess of generating high returns on capital which continues to be the norm. Whether a higher return on capital is achieved through mere economies of scale (running the scan numbers) or by adding value to customers through new technology (AI) (as the CEO states below), net profit margins look admire they may grow for some time here.

“There were two primary reasons for the enhance. The first was the opening of a new HMCA-managed site in Casselberry, Florida last March. The second was the full return to regular business hours at all HMCA-managed facilities, thanks to having successfully addressed the MRI technologist staffing shortages caused by the COVID-19 pandemic.”

“I am also pleased to announce that we now utilize SwiftMR™, Artificial Intelligence (AI) software, at all HMCA-managed sites. SwiftMR™, an FDA 510(k)-cleared software product of AIRS Medical, Inc., uses AI-powered denoising and sharpening to improve the quality of MRI images and enable the reduction of scan times by up to 50%. Although we’ve been using it for a relatively short period, I can report that reading radiologists and referring physicians are very pleased with it; patients appreciate the shorter exam times; and the HMCA facilities have been able to reduce backlogs and plan more patients each day.”

“Also, FONAR is now the exclusive distributor of SwiftMR™ to FONAR customers for use on their FONAR MRIs and any other MRI scanners they may own. We are proud to be working with AIRS Medical and look forward to a long and mutually beneficial relationship.”

Furthermore, Fonar’s stated return on capital of just under 6% takes all of the company’s equity into play. However, line items such as goodwill, intangible assets & the company’s strong cash position, etc do not contribute anything to the generation of the company’s profits. Therefore, we prefer to divide trailing net profit into the sum of Fonar’s net fixed assets & net working capital (as these are essentially the only assets needed which create the company’s profits). Therefore our adjusted ROC would now come in at a much higher 9.64% which again demonstrates both a rising internal trend as well as superior profitability to the company’s peers.

Conclusion

To sum up, Fonar’s numbers & trends in its recent Q1 report resulted in a spike in shares to the upside. The doubling of net income on double-digit revenue growth demonstrated sizable net-margin growth which would not have gone unnoticed. Furthermore, the stock fundamentally remains very cheap from cash & earnings standpoints, currently reporting a trailing earnings yield of 9%+. Looking for advance growth here. We look forward to continued coverage.