(FORTUNE Magazine) – MAKING A SPLASH WITH LIQUID BLADES

It takes eons for rivers to carve through canyons, but if you force water through a nozzle the diameter of a human hair at 2.6 times the speed of sound, it slices through most materials faster than a Ginsu knife. Superhigh-pressure water-cutting tools made by Flow International in suburban Seattle do just that, and are used to cut items as sundry as diapers, carpets, graham crackers, and Tyson chicken. No more worrying about broken blades. Add powdered garnet to the water stream, and it can bore through marble, steel, or composite airplane wings without the heat or vibration caused by metal saws. Flow is awash in profits, which rose 162% in the fiscal year ended April, to $7.7 million, on sales of $110 million. Bill Whitlow, an analyst at Pacific Crest Securities who expects earnings to grow about 30% annually for the next three years, thinks the stock is cheap.

Already popular with customers such as Kimberly-Clark, Boeing, General Motors, and Sara Lee, Flow is now targeting mom and pop machine shops, offering them less expensive models at around $100,000, vs. the $250,000 robotic systems sold to larger clients. And prices are dropping. "We want to be the machine-tool company of the future," says Ron Tarrant, CEO for the past four years. Tarrant turned around the company and has kept it profitable.

Uses for Flow's products are expanding along with its customer base. Water-jet cutters, for example, excise abandoned oil rigs from the ocean floor for Chevron and Shell Oil, which is more environmentally friendly than blowing them up. Water-jet cleaners strip lead paint from ships and bridges, and scour jet engines. "Each day we are uncovering new applications," says Tarrant.

The recent purchase of two robotics companies, for $20 million, enhances Flow's earnings and its ability to provide complete cutting systems. And Tarrant hints he'd like more software expertise.

A MATE FOR MERCK ...

In a February supplement of the American Journal of Medicine, John Yates, one of Merck's in-house osteoporosis researchers, practically endorses CompuMed's OsteoGram. That bodes well for the tiny medical technology company that lost $3.9 million on sales of $2.4 million last fiscal year. Its OsteoGram test helps physicians diagnose osteoporosis by measuring bone density using computer analysis of a standard hand X-ray. One big fan could be Merck. Its new osteoporosis drug, Fosamax, which received preliminary approval from an FDA advisory committee in July, could greatly benefit from such technology since it would help doctors identify the underdiagnosed disease. Says a Merck spokeswoman: "Our goal is to increase the number of women diagnosed with osteoporosis before they suffer a fracture." To that effect, the drug Goliath has already signed joint financing agreements with specialty X-ray makers Hologic and Lunar.

CompuMed, which acknowledges that it is seeking a marketing partner, may be next. A deal with Merck would be sure to strengthen the $6 stock of the small Manhattan Beach, California, company.

... A SEQUEL TO THE JERK?

Finally, here's a product that measures up to the Opti-Grab--a device to remove glasses--which was invented by Steve Martin in his 1979 movie, The Jerk. CNS's Breathe Right is a sticky tape designed to make breathing easier by holding nasal passages open. This potential boon for snorers (and their mates) really took off when NFL players started wearing the strips to increase their oxygen intake. TV exposure helped the company turn its first profit--$9 million, on sales of $26 million, in the first half of 1995. Since January the share price has blown from $4 to around $20, giving the Minneapolis company a market cap of $370 million.

While Martin's invention induced crossed eyes, the tapes have a different problem. Overcompensating for an initial failure to keep up with orders, CNS has stuffed distribution channels, is now building up inventory, and has few back orders. A money manager sniffs, "the tape is a fad product with no patent protection that is idiotically easy to make." He's shorting the stock.

CEO Daniel Cohen, who says CNS is seeking patent approval, pins hopes for a sales leap on new packaging, line extensions--and an ad campaign geared to the upcoming football and common cold seasons.

Piper Jaffray's Michael Sabbann likes the stock but says investors will need "to go on faith" that customers will be repeat buyers. But there's no such faith at Band-Aid maker Johnson & Johnson. "We looked at the product category," says spokes man Robert Kniffin, "and decided not to enter the market."