Natali_Mis
Natali_Mis
Shares of Merit Medical Systems (NASDAQ:MMSI) have moved a bit lower, as investors are not impressed with the 2024, and in fact the multi-year guidance. Mid-single digit organic sales growth and modest margin expansion are not sufficient to drive great appeal, as shares trade at still demanding realistic earnings multiples. Investors, furthermore, have to face the upcoming departure of its long term serving CEO and founder Fred Lampropoulos next year as well.
With valuations looking demanding, the real appeal has to come from great execution and continued solid M&A efforts, as shares have simply become fully priced in recent years, which makes me cautious, even after a recent small pullback.
Merit Medical was founded in 1987, only to go public three years later in 1990. What is more remarkable is that the company is still led by its founder Fred Lampropoulos, who is also an inventor and holder of over 200 medical device patents.
The company has steadily grown the business under this leadership to over a billion in sales, generated from serving over 13,000 customers across the globe through more than 200 medical product categories. Revenues are generated pretty equally between the US and international markets, with the company focusing on segments such as peripheral intervention, cardiac intervention, custom procedural solutions and endoscopy, although the latter is just a small part of the business.
Since 2016, some $600 million was spent on bolt-on M&A as these deals have been well-integrated into the business, with the combination of organic growth and bolt-on dealmaking standing at the basis of decent long term returns to investors. A roughly $1 stock at the time of the IPO traded at similar levels late in the 1990s, as this was a stock in its $10s to the mid 2010s. Momentum already revealed itself since the second half of the 2010s, as shares rose to a high around $85 in the summer of last year, with shares now trading around the $75 mark.
The peak in the share price of Merit happened in the summer of last year, a time when the company announced two bolt-on acquisitions, while the company did see solid operating advancements. Investors had to digest some scary news in December, as the business is preparing for the retirement of founder and CEO Fred Lampropoulos, which will still serve until year-end 2025.
Driven by organic growth and dealmaking, the company reported solid growth for 2023 recently. Full year sales rose by 9% to $1.25 billion, with fourth quarter sales up more than 10% to nearly $325 million. The company has seen a solid year in margin terms, with GAAP operating income of $124 million coming in near 10% of sales, and GAAP earnings reported at $94 million, equal to $1.62 per share.
Adjusted earnings were reported at $3.01 per share, after no less than a dozen adjustments. Given the size and number of adjustments, the reality in terms of realistic earnings probably comes in somewhere between both earnings metrics.
For 2024, the company outlined a somewhat more cautious guidance, with sales seen up between 4-5% to a midpoint of $1.32 billion, although that adjusted earnings per share are seen up 9-11% to $3.28-$3.35 per share amidst modest margin gains.
With 58 million shares down to $75, a $4.35 billion equity valuation comes down to a $4.6 billion enterprise valuation, equal to about 3.7 times trailing sales and 25 times adjusted earnings. If however I assume adjusted earnings close to $2.50 per share, multiples increase to 30 times trailing earnings, and while growth is seen in earnings, valuation multiples remain somewhat demanding.
The truth is that roughly 10% GAAP margins are not too impressive, as the company has outlined aggressive 2026 plans. Labelled "continued growth initiatives", Merit targets an organic growth performance of at least 5% sales growth, but more important, 20% non-GAAP operating margins. This compares to an 18.2% margin on this metric as reported in 2023, perhaps a bit non-inspiring to some investors, yet it really is the large gap between both earnings metrics which raises concerns with investors and hopefully should close with the passage of time.
If this happens, basically operating earnings could increase by about 10% (based on the current sales base) which drives earnings growth, but I understand why investors are cautious to pay a realistic 27-30 times earnings metric amidst modest margin potential from here and mid-single digit organic growth expected.