Medical supply company Kinetic Concepts (NYSE:KCI) is rumored to be in talks to go private. Its stock popped 12.6% on the news Wednesday after an 84% rise in the last 12 months. But is that pop all that was left in the stock’s upside?

Blackstone Group (NYSE:BX) is in talks to buy Kinetic Concepts for about $5 billion, making it one of the largest leveraged buyouts since the financial crisis, according to the Wall Street Journal. Blackstone has recently raised a $16 billion fund and that cash may find its way to Kinetic Concepts shareholders.

I wouldn’t buy the stock on the prospect of the deal going through, because there is little upside opportunity assuming that the buyer pays cash.

If the deal doesn’t go through, however, there are three good reasons to consider this stock:

• Strong first-quarter performance. Kinetic Concepts beat earnings and revenue estimates in its most recent quarter. Revenue grew 3% from a year earlier and came in 2% above analysts’ expectations.
• Long-term financial strength. The company has grown rapidly. Its $2 billion in revenue has increased at an average rate of 10.8% over the last five years while its net income of $272 million has climbed at a 16% annual rate over that period. Its $935 million in debt at the end of 2010 is down 34% since its 2008 peak, and its cash has grown at a 31% annual rate between 2006 ($107 million) and 2010 ($317 million).
• Out-earning its capital cost. Kinetic Concepts earns more operating profit than its cost of capital and it has solid EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Kinetic Concepts’ EVA momentum was 1%, based on 2009 revenue of $1.99 billion, and EVA that improved from $69 million in 2009 to $85 million in 2010, using a 9% weighted average cost of capital.

One negative on the stock is its high valuation. Kinetic Concepts’ price-to-earnings-to-growth (PEG) ratio of 2.05 makes it quite expensive (a PEG of 1.0 is considered fairly priced). Kinetic Concepts’ P/E is 17.6 and its earnings are expected to grow 8.6% to $5.47 a share in 2012.

Kinetics Concepts is a good company but a bad stock investment for now. If the buyout rumors prove false, the stock is sure to plunge. If it plunges enough, the stock’s valuation might become attractive. If the rumor is true, there is very little upside unless a higher bid comes along.

Peter Cohan has no financial interest in the securities mentioned.