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  The Fonar prognosis

BENJ GALLANDER and BEN STADELMANN

Monday, September 19, 2005

There are always valid reasons not to buy the stocks that we at Contra the Heard purchase.

Take a look at the acquisitions in 2004. Leitch had been losing money for years and the corner office felt like a revolving door of managers. NQL Drilling Tools and Saskatchewan Wheat Pool were a whisker's breadth from bankruptcy and earnings had the earmarks of razor burn. Theragenics had seen sales plummet from over $50 million (U.S.) to $33 million and splashed red ink.

Fortunately, the first three have all done very well, while TGX is down about 40 percent. Can't win 'em all.

Currently, our choicest stock is arguably Fonar, purchased in March this year at $1.25, but now trading at just over a buck. Another Theragenics in the cards, perhaps?

It could easily be argued that this company, which manufactures, sells and services magnetic resonance imaging scanners, should be avoided. First off, the last time this outfit turned a profit was way back in 1997, and results were only positive that year because of favourable patent litigation settlements. The company trades at about 2.5 times book value, not cheap by our standards.

Competition is stiff, with competitors like General Electric, Siemens, Alliance Imaging and Radiologix. Recently the firm announced a 10 million-share shelf registration, meaning that there is an overhang of shares depressing the market with possible dilution.

However, in our view, the positives are compelling. Revenue jumped from about $44 million in 2002 to almost $72 million last year, with the loss trimmed from almost $23 million to $9 million and change. The first six months of this year saw a nose hair profit of $1.9 million on surging sales of $54.6 million.

Revenue has jumped primarily because of the Fonar Upright, the only upright-position imaging scanner currently on the market. The advantage of this machine is that people can stand, allowing physicians to spot problems that might not be evident on traditional scanners where patients lie down. Demographics indicate that an aging, overweight population will be making more use of this equipment.

Every year from 1996 to 2002, Fonar traded above the $10 level. While that number seems too distant for even our vivid imaginations, it seems likely that this company is way undervalued. Which is why despite all of the negatives, our purchase of shares in this organization was one of the heavier buys of our investing careers.


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