Initiating Coverage on Zynex Inc. (ZYXI)

Zynex Inc.’s (ZYXI) stock was seriously punished with the April 2009 restatement announcement and, despite revenue growth of almost 60% in 2009 and 30% through the first nine months of 2010, has yet to fully recover. Until there is resolution on what we would characterize as “significant” lingering concerns (most notably the outstanding lawsuit and ongoing refund claims by Anthem), we believe Zynex’s stock will continue to trade at a significant discount. Complete insider control and thin float also generally penalizes valuation – as Zynex’s CEO owns 60% of the outstanding shares, we also expect this to continue to weigh on the share price.

We are also concerned about the current absence of a definitive and significant catalyst to propel long-term revenue growth. Zynex’s recent strategy of recruiting competitors’ sales reps may not be sustainable for more than a few more years, especially if larger competitors increase commissions to their reps in order to stem their sales force attrition and the resultant market share losses to Zynex. The new businesses (Monitoring and NeuroDiagnostics) may indeed evolve into very meaningful contributors to and drivers of long-term revenue growth. But until there are more specifics on the products expected to be developed through these businesses and plans relative to R&D strategies and efforts, it is impossible to comfortably gauge the viability of management’s expectations for these units or their potential financial contribution.

Despite our concerns and the hangovers from the lawsuit/restatement and ongoing insurance claims, we think Zynex’s stock trades cheaper than what is warranted given the potential to continue to post significant sales (and EPS) growth over the next few years. While our model is largely predicated on the faith in management’s somewhat general financial guidance (for FY 2010 and 2011), the company has demonstrated that their relatively simple strategy of expanding the size of their sales force has been successful enough to grow revenue at a CAGR of 94% over the last three full fiscal years (from $2.6 million in 2006 to $18.7 million in 2009 and is at a $23.0 million run-rate for 2010 through the first nine months). We think it’s reasonable that revenue can grow another 27% in 2011 (compared to guidance of 30% – 40%) and 17% in 2012 and EPS growth can accelerate as long as management contains the growth in operating expenses (which there should be ample opportunity to do).

Based on our model we look for EPS to grow at a four-year CAGR of about 17% through 2013. We use a PE/G ratio of 0.8x to value Zynex. This represents a 20% discount to the 1.0x that is generally considered “fair value” and a 33% discount to the approximate 1.2x PE/G that the medical equipment industry currently trades at. Our discount reflects the various concerns and risks that we have outlined throughout this report. Resolution of some of these concerns and/or mitigation of risks would likely warrant a lower PE/G discount and, therefore, a higher price target. Actual EPS falling short of our estimates and/or adverse consequences related to risks/concerns could prompt us to lower our valuation for Zynex.

As it stands now, we value Zynex at $1.40 per share (calculated using four-year PE/G of 0.8x and 2011 EPS estimate of $0.10). ZYXI currently trades at $0.65. We are initiating coverage of Zynex with an Outperform rating and $1.40 price target.

For a free copy of the full research report, please email with ZYXI as the subject.

By Brian Marckx, CFA

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