Is Atrion Corp (NASDAQ: ATRI) set for a Rebound?

Is Atrion Corp (NASDAQ: ATRI) set for a Rebound?

In the medical sector, so much attention is paid to massive, large-cap firms like Johnson and Johnson (NYSE: JNJ) and Tyco International Ltd. (NYSE: TYC), while smaller companies sometimes go by unnoticed. This gives you a great chance to find undervalued stocks in the medical industry.  Atrion Corp (NASDAQ: ATRI) is one of these stocks.

Atrion Corp is a small cap company with a current value of about $379 million. They produce medical devices and specialize in fluid delivery equipment for cardiology and ophthalmology. This is a pretty niche market without a lot of competition.

Baxter International Inc. (NYSE: BAX) and Covidien plc (NYSE: COV) make some of the same products, but are also spread across many other medical fields. As a result, Atrion has an advantage by being more specialized in its market and has used this advantage to generate pretty steady cash flow and growth.

This paid off for investors. Atrion was able to deliver earnings per share growth of at least 10% a year for the thirteen years between 1999 and 2011. During this same period, Atrion took its share price from $8.00 a share to nearly $250 a share in 2011. In a way, things were going nearly too smoothly for this company.

In 2012, Atrion gave investors a scare when it reported negative growth in both revenues and earnings. Its return on equity and return on assets also fell by about 2-3%. This sparked a selloff that brought the share price to its current level at $188. While the weak financial data is concerning, there’s good reason to believe investors oversold this stock.

Part of the reason why Atrion’s margins fell is because it made a large share repurchase at the end of 2011. This is an accounting issue and doesn’t reflect the performance of the company. Even with this drop, Atrion still has a very healthy 29% operating margin and 20% profit margin.

Atrion also has a rock solid balance sheet. The company has no debt at this time and is holding on to about $38 million in cash. It seems that the company is building up its reserves while it looks for its next research development. This is definitely smarter than rushing into a losing investment.

In the past, Atrion has shown that it knows how to make the most out of a new opportunity. When it finally develops a new product, earnings should jump up. In the meantime, Atrion is returning this extra money to its shareholders through dividends and stock buybacks, most recently making a special $10.00 a share dividend in November 2012.

For the short-run, there’s no reason why Atrion’s price should fall even further. Instead, there’s a good chance that it’ll bounce back after it delivers a few more quarters of solid earnings. For the future, it all depends on whether Atrion can develop another winning product. Based on their track record, I’m betting they will.