Earnings Growth Driving Sonosite’s Chart Strength

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Medical gear maker Sonosite climbed 7% last week in heavier-than-normal volume. As you can see on its stock chart, it’s holding onto its gains this week, a sign of strength.

This is a stock that’s shown up on our radar screens periodically, though its fundamentals made it less than ideal in late 2008 and early 2009.

The company makes bedside and point-of-care ultrasound systems. Last month, it got FDA approval for a new catheter system using fiber optics and a technology similar to infrared to replace a traditional guide wire, allowing for easier tracking of a tracking of a catheter tip as it moves through a vein.

Earnings growth was erratic until the quarter ended in December 2009. Year-over-year sales were declining until the quarter ended in March.

The stock went public a decade ago, in September 2000. Most of the growth names on my screens tend to have gone public within the past 15 years or so. That’s generally the time in which a company shows the most innovation, which drives sales and earnings.

Yearly earnings declined slightly in 2009, profit grew again in the past three quarters

After declining for four quarters in a row, sales grew at a rate of 8% and 18% in the past two quarters.

Wall Street sees profit up 148% this year and 72% in 2011. One possible area of weakness: Its return on equity is just 2%. On our screens of the best growth names, ROE is generally around 15% or higher. That’s a measure of operational efficiency that often has an effect on the company’s ability to drive earnings growth.

Consensus estimates for the third quarter call for earnings of 11 cents per share, more than double the year-earlier figure of five cents. Sonosite’s continued emphasis on research and development could play a key role in driving growth ahead – again, that’s a hallmark of growth winners that pop up on our research screens.

When earnings and sales growth outpace the general market, it draws the attention of fund managers and other pros. It’s their institutional buying that sends a stock’s price higher – and individuals would be wise to follow in their footsteps.