stefanamer/iStock via Getty Images
Technical Analysis
We wrote about FONAR Corporation (NASDAQ:FONR) in December of last year when we stated that investor sentiment was finally turning bullish in the stock. Encouraging growth trends in both revenues & earnings, sound cash flow & elevated return on capital trends resulted in us placing a ‘Buy’ rating on the magnetic resonance imaging-focused company. Although shares are down roughly 13% since our ‘Buy’ call last December, the stock eclipsed $22 a share in February of last year, before entering a pattern of lower lows until late May of this year, as we see below. Given, though, how history repeats itself many times in stocks (and the fact that FONAR looks set on delivering a MACD buy signal over the near term), we are reiterating our Buy rating on FONR for the following reasons.
FONR Intermediate Chart (Stockcharts.com)
Firstly, the fact that shares of FONR managed to take out their 2021 highs is noteworthy, as this may denote a long-term change in trend in the stock. Secondly, the fact that the recent May lows took place above FONAR’s 2023 lows is another encouraging trend. As mentioned, we are waiting for follow-through to the extent of a bullish MACD intermediate crossover followed by a bullish moving-average crossover in due course.
Given the end of the stock’s trend of lower lows, we believe the above technical ‘events’ will happen for the following reasons. The most recent MACD bullish crossovers in 2022 & 2023 resulted in sustained bullish moves. These crossovers essentially revealed the psychology of the market when FONR participants deemed the risk/reward setups to be favorable at those times. Human Psychology in the main, as we know it does not change, which is why another bullish move is likely in our opinion. Remember, the MACD on longer-term charts is an excellent predictive tool as it is a solid read on both the momentum & trend of the underlying stock. Furthermore, the more oversold the MACD crossover, the better the setup, all things remaining equal.
Near-Term Growth Rates Better Than Historic
All the key metrics on FONAR’s income statement, such as revenues, operating profit & net profit, are on the rise. Furthermore, with revenues increasing by 6% over the past 9-month period ($76.9 million – total) & operating profit & net profit growing by 24% & 25% respectively over the same timeframe, we see that operating & net profit margins are also on the rise. Moreover, total MRI scan volume at HMCA locations rose by a double-digit percentage to hit almost 155k over the nine months up to March 31st this year. Therefore, investors should size up FONAR’s near-term growth rates with where shares are currently trading on the 5-year chart. Suffice it to say, faster near-term growth rates combined with a share price which is trading well below its respective 5-year average bodes well for future gains in FONAR.
FONAR Growth Metrics (Stockcharts.com)
Valuation
Except for cash flow, FONAR’s GAAP earnings, assets (book value) as well as sales are currently cheaper than what we have been accustomed to over the past five years. Furthermore, the fact that shareholder equity continues to rise and the number of shares outstanding continues to fall demonstrates strong cash-flow performance over time. Suffice it to say, to give an idea of how cheap FONAR is becoming from a valuation standpoint, if management decided to pay out all of its earnings to shareholders in the form of an annual special dividend, shareholders would receive close to 10% on their investment over a 12-month timeframe. Furthermore, the absence of interest-bearing debt & record quarterly scan volume are also strong valuation drivers that should not be overlooked.
FONAR Valuation metrics (Seeking Alpha)
Encouraging Forward-Looking Fundamentals
With the ramifications of the pandemic (and how this adversely affected scan volumes at HMCA-managed sites in due course) very much behind FONAR at this stage, management believes momentum can continue throughout the remainder of fiscal 2024 & beyond. The company’s growth strategy revolves around setting up new locations or placing more MRI scanners at existing locations to meet growing demand. Furthermore, the ongoing adoption of SwiftMR by radiologists & physicians alike will further improve the company’s economies of scale due to capital being able to be turned over faster than before.
The use of SwiftMR improves the quality of MRI imaging & incorporates shorter scanning times for patients, which is key. Suffice it to say, that the rollout of this product automatically enables the company’s scanners to generate more forward-looking returns for shareholders going forward. Furthermore, it will be interesting over time to see if this product can be improved upon over time, which would be a further win-win situation for FONAR shareholders.
One major reason for the increase in scan volume at HMCA-managed sites is the employment of SwiftMR, a product of AIRS Medical that enhances the quality of MRI images and enables shorter exam times. SwiftMR is basically a software product that de-noises and sharpens already completed MRI images. The results are very impressive.”
Conclusion
The investment case for FONAR is the following. With demand for its services remaining strong and with its scanners being able to return more profitability, gains look on the cards for FONR stock considering its encouraging recent growth rates & keen valuation. We look forward to continued coverage.