Amerigon ( Nasdaq - ARGN ) -- Lower than Expected Q4 Margins

Amerigon (ARGN $12.50) reported Q4 sales that were consistent with our estimate.  Margins contracted, however, leading to a lower than expected earnings report.  A nonrecurring non cash tax adjustment enhanced the headline number.  Sales advanced 34% to $28.9 million.  Fully taxed earnings increased 14% to $.08 a share.  Manufacturing margins decreased as a result of higher tellurium costs.  That's the key ingredient in Amerigon's air conditioned car seats.  Research expenses also jumped after the company bought out its 15% development partner.  Amerigon now owns any future applications outright but will be responsible for 100% of the expenses, too.  The company also created a reserve to pay legal costs that are expected to be incurred in 2011 in a patent dispute.  For the entire year income finished at $.39 a share (+457%).  That number does not include non cash stock option expense but is taxed at a full 37% rate.  Sales were up 85% at $112.4 million.

We are reducing our 2011 earnings estimate by a dime to $.45 a share.  Manufacturing margins may stay under pressure as rare earth commodity prices remain at elevated levels, bolstered by demand and political factors in China.  Amerigon isn't likely to experience shortages, since most of its production facilities reside within the communist state.  Unit volume on existing auto platforms is likely to widen in 2011 as people replace their aging vehicles with new ones.  Amerigon focuses on high end cars, which continued to sell pretty well last year.  It's unclear how big a lift the company will enjoy from a rebound in the mid- and low-price segment.  Take rates remain lofty but might not expand if car buyers adopt a price conscious approach towards optional equipment.

Non-auto applications remain in development.  Those projects have power hitting potential but still are in the low minors, to use a baseball analogy.  Development has taken longer than originally hoped.  It remains to be seen whether those efforts can overcome the engineering hurdles involved.  Meantime, a line of heated and cooled beds (king and queen sized) is providing an element of diversification but is unlikely to contribute more than 1%-2% of total revenue in 2011.  Our advice is to close out positions and reinvest the proceeds in a Special Situation with better defined near term prospects.

( Click on Table to Enlarge )

Healthstream ( Nasdaq - HSTM ) -- Launches Simulation Business

Healthstream (HSTM $6.75) plans to launch its high potential simulation software line in April.  The company and its 50-50 partner, Laerdal Medical, recently completed the underlying technology platform.  It now is developing specific applications which will be sold on a recurring revenue basis.  Healthstream initially will market the software to its existing customer base in the United States.  Laerdal Medical, which is based in Norway, will focus on the international market.  Development kits have been provided to several third parties, which are experts in various medical procedures.  Those applications will be sold to end users through the Healthstream-Laerdal online store, similar to the iTunes model.  The partnership also will provide management software, to run individual events; and software viewers to operate the simulations on the end user computers.  The company declined to forecast the new line's 2011 revenue potential.  Our estimates assume only a modest contribution will be generated during the early going, and that some start up costs will continue to be incurred.  After the technology gains momentum substantial growth appears attainable.  Meantime, business remains strong in the core educational software line.  Our estimates are unchanged. 

( Click on Table to Enlarge )



Acacia Research ( Nasdaq - ACTG ) -- Follow-up Report

Acacia Research (ACTG $27.50) appears on track to report excellent on target Q4 results.  As expected, the company didn't complete any large deals in the period.  Earlier in the year Acacia licensed all the patents it controls to Oracle and Microsoft in separate transactions, boosting performance sharply in those periods.  Our estimates reflect a generally breakeven showing in the December quarter.  Acacia did end the year with about 180 patent portfolios, and the company continues to accumulate intellectual property at a fast pace.  Individual settlements are likely to keep expanding in number during 2011.  Acacia remains confident it will consummate three large transactions this year, as well.  Investment requirements remain modest.  So most income is likely to turn into into cash flow.  Acacia may invest that money in patents directly, eliminating the need to split its winnings with existing patentholders.  Dividends and buybacks are a possibility, as well.

( Click on Table to Enlarge. )



Image Sensing Systems ( Nasdaq - ISNS ) -- Follow-up Report

Image Sensing Systems (ISNS $13.50) appears on track to report excellent on target Q4 results.  The company is the leading manufacturer of machine vision systems used in traffic management applications.  Cameras are mounted at intersections.  Images are fed into onboard computers, which dynamically change the lights to keep the cars moving efficiently.  Besides being more intelligent, machine machine systems cost less than conventional underground sensors ("loops").  Those products require the road to be torn up when they're originally installed or replaced.  Image Sensing's technology also is used on highways and in tunnels to report accidents, fires, and other emergencies. 

Results have stalled over the past two years due to budget pressures.  State and local governments account for most of the company's orders.  Image Sensing has responded by driving down costs and prices, improving performance, and gaining market share.  Two years ago Image Sensing acquired a maker of radar detectors, which work better than machine vision in poor lighting or bad weather conditions.  This year the company plans to launch a combination system that employs both radar and machine vision.  Image Sensing also purchased a license plate reading technology in 2010.  That remains a niche market at present but could be integrated as a standard feature over time.  Police and homeland security funding could supplement highway department outlays, helping things from a budgetary standpoint.

Foreign business varies from period to period.  But the long term trend is higher.  Image Sensing currently is strongest in the Far East and Eastern Europe.  Marketing efforts have been expanded in those areas and could lay the groundwork for accelerating gains in future periods.  For now, we estimate that financial performance will remain solid but unspectacular.  Income appears headed towards $.90 a share in 2010, down from $1.15 the year before.  Next year a rebound to $1.35 is possible as the new products kick in, international volume keeps rising, and overall U.S. demand improves modestly.

( Click on Table to Enlarge. )



Zagg ( Nasdaq - ZAGG ) -- Penetrates Verizon Retail Stores

Zagg (ZAGG $9.75) will start selling its Invisible Shield products through Verizon's retail stores.  Last year the company signed up ATT as a retail partner.  Best Buy remains Zagg's largest distribution channel.  The launch will be coordinated with Verizon's introduction of the Apple iPhone in February.  Protective coverings for the iPhone probably will account for most of the incremental revenue boost, although the company could benefit from Blackberry and Android business, as well.  Results also promise to respond from Zagg's new Irish distribution center in 2011.  Europe presently accounts for 10%-15% of sales but customer acceptance of the Invisible Shield is high, and volume could respond to more aggressive marketing efforts.  U.S. results could gain an additional lift if Radio Shack, which hasn't done much to date, adjusts its marketing efforts to reflect Best Buy's approach. 

We are raising our 2011 earnings estimate by a dime to $.60 a share.  We also are lifting our sales estimate by $5 million to $90 million.  Growth is likely to be sustained at above average rates for at least several more years as the mobile device market keeps expanding.  Zagg hopes to leverage that success by launching additional products that capitalize on its brand name and distribution network.

( Click on Table to Enlarge. )