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Saturday, September 17, 2005

Emergent Group (EMGP)

This company (website) leases surgical equipment to those who can't justify the large capital expense due to low utilization. Gross margins are 30% and SG&A is 29%, so it's a crappy business unless the depreciation schedule is overly pessimistic (which is possible). Regardless, it's going to be a capital intensive business, which is bad.

Net income was $23K in 2004 and $58K in 2003. They've been shifting away from non-surgical leases, which has made margins even worse. Free cash flow has been about $400K each year (close to 10 cents a share with the stock selling at 65 cents), but this is because of the gigantic depreciation. Free cash for for the 1st half of 2005 was $600K. With 5 million shares, that's 12 cents in 6 months.

Assets are 1/3 AR, 1/3 property/equipment, and 1/3 goodwill+inventory+misc.
Liabilities are a spread out among accrued expenses, AP, capital leases, debt, etc.
Equity is $1.9 million, Total liabilities are $2.6 million.

The real question for this company is going to be correct depreciation and making sure to include the cost of capital in case it's [partially] buried in equity placements rather than debt with clearly visible interest payments at market rates.

The stock price is such that it would probably be difficult to buy many shares for under a dollar.

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