We came across a bullish thesis on FONAR Corporation (FONR) on Substack by Mark Perkins. In this article, we will summarize the bulls’ thesis on FONR. FONAR Corporation (FONR)’s share was trading at $13.98 as of March 17th. FONR’s trailing P/E was 12.25 according to Yahoo Finance.
An MRI scanner being used to diagnose primary mitochondrial myopathies in a clinical setting.
Fonar Corporation (FONR), based in Melville, New York, has a long history of innovation in medical imaging. As the creator of the world’s first full-body MRI scanner in 1977, Fonar commercialized the technology in 1980 and went public in 1981. The company remains a niche player in the MRI industry, specializing in its unique “Upright MRI,” which allows patients to be scanned in various positions, including standing, sitting, and bending. This makes it particularly valuable for diagnosing conditions that only appear when the patient is in a weight-bearing position. Additionally, the Upright MRI is an excellent alternative for patients with claustrophobia, setting it apart from conventional recumbent MRI scanners.
Fonar’s business model is driven by both MRI sales and servicing, with a significant portion of revenue coming from its Health Management Company of America (HMCA) subsidiary. HMCA manages MRI centers in New York and Florida, operating 43 scanners across 28 locations. This management service provides stable, recurring cash flow, making Fonar a more predictable investment compared to many other deep-value stocks. While the company’s revenue growth has been steady, its financials reveal both strengths and challenges. In fiscal 2024, HMCA-generated revenue reached $94.6 million, up from $90.4 million in 2023. Overall, Fonar’s trailing twelve-month revenue stands at $101 million, growing slowly but consistently. The MRI industry itself is expected to expand at a 5%-6% CAGR, increasing from $7 billion in 2024 to around $13 billion by 2034. Fonar competes with major players like Siemens, GE, Philips, and Canon, but its mid-field MRI with 0.6 Tesla remains a unique alternative to traditional high-field MRI systems.
Fonar’s financials highlight a strong balance sheet and consistent free cash flow generation. Over the past five years, shareholder equity has grown at a compounded annual rate of 3.2%, reflecting a stable business model. The company has also maintained a healthy cash position, with free cash flow averaging $12.2 million annually over the last five years. Fiscal 2024 saw free cash flow increase to $13 million, a notable improvement from the $10 million recorded in 2022 and 2023. At its current valuation, the stock trades at 11 times trailing twelve-month free cash flow, offering an 8.9% free cash flow yield, with a similar valuation on an earnings basis at 12 times trailing earnings per share.
Despite these strengths, Fonar faces headwinds, particularly margin compression. Gross margins have declined from 51% in 2017 to 41% today, and earnings growth has been inconsistent. The company’s reliance on third-party insurance payments has impacted patient fee revenue and management fees, posing a risk to long-term profitability. While the stock remains in deep value territory, with a market cap of $87 million and net tangible assets of $107 million, earnings have declined at an average annual rate of -6.5% over the past five years. Institutional ownership remains stable, with roughly half the float held by institutions. However, the stock has experienced a slow decline since its 2017 peak, with recent trading levels approaching prior support in the $12-$13 range.
A potential catalyst for the stock could come from either a strong earnings report or a fundamental shift in market sentiment toward stable, cash-generating medical businesses. With no analyst coverage, Fonar remains under the radar, but its valuation is increasingly compelling, offering a free cash flow yield above 10%. While waiting for its next earnings report in May could provide clarity, an entry at current levels, especially if it approaches half its net-net value, presents an attractive opportunity.
FONAR Corporation (FONR) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 3 hedge fund portfolios held FONR at the end of the fourth quarter which was 4 in the previous quarter. While we acknowledge the risk and potential of FONR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than FONR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.