The recent correction in the market has been an equal-opportunity destroyer. One part of the market that may have been penalized excessively is Small-Cap Medical Devices. While many companies in the space have struggled over the past few years, others have been thriving. I decided to screen for growth and value characteristics to see if there might be any babies tossed out with the bathwater. Here are the parameters:
- Trailing Sales Growth > 10%
- GM > 50%
- EV/Sales < 2X
7 companies made the cut:
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The median YTD return is -6%, not too far from the overall market, but the QTD return of -24% is sharply lower than the Russell 2000's performance.
I use Enterprise Value to Sales for two reasons. First, many of these companies are loaded with excess cash, and the EV calculation credits them. Second, most of these companies are not mature, so they haven't reached operational efficiency. Given that they all have very high gross margins, it seems reasonable to compare them relative to sales.
While I am most familiar with Synovis (SYNO), which is in my Top 20 Model Portfolio, and Nuvasive (NUVA), I am aware of most of the others to some degree. SYNO, which is sitting on $5.50 a share in cash, has several growth drivers, including biological materials and microsurgical tools used in breast augmentation,hernia repair, achilles tendon repair, bariatric surgery, rotator cuff and other areas. A large acquisition from two summers ago has been a drag on earnings and has masked very strong earnings growth in the core business.
NUVA disappointed investors greatly in 2010 and has hit a slow patch recently, but the innovative non-invasive spinal surgery procedure they offer has shown remarkable growth over the last several years. The stock has never been this cheap.
Zoll Medical (ZOLL) looks like the winner in the external defibrillator market. Unlike the rest of the companies that made the cut, the stock is trading at a substantial premium to its valuation over the past few years.
ICU Medical (ICUI) is one I have passed on after considering the reliance on CEO George Lopez, who owns 19% of the company. With that caveat, though, everything else looks good from what I can tell for this provider of special systems to connect I.V. devices that prevent infections, including over $6 per share in cash.
With the typical stock on this list down 24% in six weeks, it seems like there may be some bargains. All of these companies have enjoyed strong growth in recent years and sell consumables rather than equipment. In a weak economy, the growth might slow somewhat, but these companies are likely to grow even in adverse economic conditions. A fkinal kicker: Several of these would seemingly offer strategic value to larger Medical Device companies.
Disclosure: I am long SYNO.
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