As of Friday's close, HDIX trades at an enterprise value [EV] to revenue ratio of just 0.4X, EV to EBITDA ratio of 2.9X with a market cap of $82M, enterprise value of $48M, trailing 12-month [ttm] revenue of about $122M, net income (ttm) of $8M, and a PE (ttm) of 11X. The current share price of $4.70 includes zero debt and about 2 bucks per share or $34M in cash while generating $11.9M or 63 cents per share in operating cash flow in the past year.

Last month, HDIX reported 3Q08 revenue of $35.6M (up 12.2% from the year-ago period) and net income which decreased to $4.5M or $0.24 per weighted average shares outstanding of 18.8M, versus $5.2M in net income in the year-ago period. In August, HDIX received FDA approval for no-coding (which is easier for patients to use since no additional steps are required when starting a new drum of test strips) blood sugar monitoring products, TRUE2go and TRUEresult. HDIX anticipates total cap-ex of $16-$18M, allocated over the next 13-15 months for new test strip manufacturing capacity, which will be online by early 2010 in anticipation of increased demand for the recently approved no-coding products.

The Company provided full-year guidance of $123M-$125M for revenue and adjusted earnings per diluted share of $0.40-$0.43. The lowered guidance is the result of several factors, including an expected 4Q08 sales mix more heavily weighted toward the new no-coding systems, which results in lower gross profit margins initially due to discounts and promotions such as free meters along with higher costs until the manufacturing operations are fully expanded by early 2010.

During 2007, the revenue breakdown for HDIX included 53% of sales to healthcare distributors such as McKesson (MCK), 23% to retail pharmacies, 12% to mail order pharmacies such as Express Scripts (ESRX), and 13% international sales (Canada). The Company expects to name a new CEO in the first half of 2009 and has hired an executive search firm to find a replacement, with the current President and CEO remaining to ensure a smooth transition period.

HDIX has grown sales from $100.2M in 2005 to $115.6M in 2007 for a compound annual growth rate of 7.4%, with another 7% growth in revenue expected for 2008 based on the mid-point of lowered guidance last quarter of $124M. Gross profit margins improved by 1.7% in 2007 at 60.6% from a level of 58.9% in 2005, with a temporary decline expected for 2008 due to the higher mix of sales from the new no-coding product lines, TRUE2go and TRUEresult.

Despite the short-term negative factors which are adversely affecting gross profit margin and operating results, HDIX is positioning itself for long-term growth in a defensive sector by offering high quality products at a discount to other leading brands and is poised to increase retail sales through co-branding agreements with RAD, WAG, and CVS. Statistics posted at the CDC website estimate the total cost of diabetes for 2007 was $174 billion, along with evidence that at least 57 million people in the U.S. have pre-diabetes in addition to the 24 million people who already have diabetes ? placing over 25% of our population at risk for complications of the disease and ensuring growing demand for diabetes care products to better manage the condition and avoid more serious complications.

Key factors to watch will be a return to sales growth in the low teens (13%-15%) and gross profit margins improving into the low sixties (62%-63%) as the Company ramps up its manufacturing capacity for the two new products and phases out the promotional activities. Once these favorable trends become apparent in the quarterly results, HDIX should find its way back to double digits around consensus analyst price targets of 10 bucks per share, providing excellent returns from the current stock price below 5 bucks where I have initiated a long position since following the stock from the time of its IPO more than two years ago.