The Story. Fonar Corporation (NASDAQ: FONR) announced annual results for fiscal 2014 on September 15, 2014 with continuing positive earnings.  Headquartered in Melville New York, Fonar focuses on the development, manufacturing, and servicing of the Upright magnetic resonance imaging (MRI) scanners.

Leveraging on unique magnetic properties of the abundant proton atom found in our body, MRI scanners can produce beautiful images that help physicians to accurately diagnose various conditions. Moreover, the roles of MRI scanner are extensive, as they can capture pathologies ranging from the hyper metabolic rate associated with cancer cells to fractures associated with sport injuries.

Source: Fonar

During fiscal 2014, Fonar recognized $68.5 million in revenues and $13.4 million in net earnings. These figures represent 39 percent and 31 percent improvements in revenues and earnings, respectively, as compared to fiscal 2013. In addition, incomes from operations were $12.3 million: 63 percent higher than the previous year.

Fonar also earned $1.58 per share while shares outstanding remain constant at 6 million; these figures show that the company creates, rather than dilute shareholders value.

More Insight. Raymond Damadian, M.D., President and Chairman said, “the Company has grown and prospered significantly over the past year as evidenced by our outstanding financial results. This is in spite of some cuts in MRI reimbursements brought about by the Affordable Care Act. This is in large part due to the extraordinary abilities of the Upright MRI, as well as our fine management staff.”

Source: Retail Investor 360

Damadian continues, “A year and a half have passed since the acquisition of the business of Health Diagnostics Management (HDM); we can look back and see how advantageous acquiring these centers was ... By combining the resources of our wholly owned subsidiaries, Health Management Corporation of America (HMCA), and HDM, we have seen the benefits of economies of scale, shared technical and administrative expertise and capabilities, as well as joint marketing strategies."

That being said. Earnings have been increasing yet improvement came from Fonar's managing and servicing subsidiary, rather than sales of the company's proprietary Upright scanners.  Therefore, the market shows concern as to whether Fonar would be able to continue its earnings increase if equipment sales do not improve.

Per the annual report, MRI sales declined in part due to larger competitors, Siemens and General Electric, having greater financial leveraging that enables them to entice customers with more attractive financing deals than Fonar's.

"In the future, we expect to facilitate growth of imaging centers through acquisitions, supporting new upright imaging centers, and increasing scan volume at our existing locations by continuing to educate the medical community about the unique diagnostic advantages of the Upright multi-position MRI. The new HMCA has 23 Fonar weight-bearing scanners and is the largest of its kind in the world,” stated Damadian.

The Chairman continued, “This scanner is extremely popular with patients who experience claustrophobia or can’t lie down for long periods… the MRI’s ability to capture motion pictures of the cerebro-spinal fluid (CSF) as it flows into and out of the upright brain and spine enables visualization of obstructions of CSF flow not found in other MRIs, and leading to new understandings of the genesis of diseases such as multiple sclerosis."

Even More. Furthermore, the Upright MRI is able to accommodate for larger patients. Studies have also shown that the Upright MRI can detect sport injury better than conventional 1.5 Teslas recumbent competitors.

A worldclass athelete seems to think so. Legendary National Football Leagues (NFL) quarterback Jim McMahon, who started his professional career in 1982 as a Chicago Bear, and then retired as a Green Bay Packer in 1996 is a strong proponent of the Upright MRI.

McMahon suffers from "post-concussion syndrome," a condition commonly afflicts professional athletes due to head collision yet rarely mentioned by NFL players. The famed Quarterback's physician, Dr. Rosa -- with the assistance of the Upright MRI -- succesfully diagnosed and treated McMahon's vertebral discs. According to McMahon, "I had vertebrae that were cutting off my spinal fluid. It was all backing up into my brain … once they adjusted those two vertebrae and all that stuff came out, I haven't had any headaches."

Bottom Line. Make no doubt, Fonar has the most advanced MRI scanners in the market. A management board of expert inventors, who pioneered the technology also manages the company. Recently, the company commenced to focus on the managing and servicing of its diagnostic centers is a prudent "vertical growth" corporate strategy – highly instrumental to earnings growth. Nevertheless, the total Upright MRI centers under management remain unchanged; there are still 23 units in the past few quarters. We believe that a catalytic jump in earnings often occurs subsequent to the addition of new diagnostic business. Moreover, scanner sales also failed to improve in the earnings report. So the conclusions of whether Fonar will be able to continue growing its bottom line remains to be seen; the rubber has yet to meet the road to make a definite conclusion regarding future earnings' growth.

All things considered. Fonar is on sale at a discount valuation and the business is an excellent buy, as long as the company continues to cut down cost, add more diagnostic centers, plus increase sales and marketing efforts of its Upright MRI. The bottom line is that investors should take a second look and determine whether Fonar is a worthwhile long term investment. Those who already bought Fonar should hold on to shares but remember to keep tabs on the aforementioned key metrics.

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