DKosig
DKosig
I have covered shares of Penumbra, Inc. (NYSE:PEN) on various occasions over the past year, as I believed that appeal was on the increase after shares sold off amidst the general market selloff in October. Shares have joined the momentum run in the wider stock market towards the end of the year, but sold off a bit again in the wake of the fourth quarter earnings release.
Priced for near perfection, investors are not too pleased with the anticipated growth and somewhat modest margin expansion seen for 2024, as the resulting setback in the stock is not enticing enough to get involved just yet.
Penumbra has been founded in 2004 and three years later launched its first neurovascular product, to launch its first peripheral vascular product in 2013. Following these product launches and approvals, the company went public in 2015, with shares priced at $28 per share.
The essence of Penumbra, and its product lineup, is that it focuses on removing clots and treating aneurysms. Unfortunately, these represent large addressable markets, with heart and brain vascular diseases and strokes being too prevalent.
By now, the company categorizes its sales across two segments: a faster growing thrombectomy business which is responsible for about two-thirds of sales, complemented by a slightly slower growing embolization and access segment.
Penumbra has been a relatively smaller player, which has been competing against large and more established players, but it has successfully done so. A $30 stock at the time of the offering ten-folded to a high of $300 in the spring of 2021. These impressive returns, with shares ten-folding over just a six-year period, were driven by revenues which ten-folded to three quarters of a billion.
For the year 2022, Penumbra reported a 13% increase in full year sales to $847 million. While the revenue base and growth is to be applauded, profitability was another issue. GAAP operating profits came in at a mere $6 million, resulting in nosebleed valuations, with shares commanding a >$10 billion valuation at levels around the $300 mark.
The company initially guided for an 18% increase in 2023 revenues, with sales seen just over a billion, although it upped the sales guidance to $1.05 billion following the first quarter results. This momentum pushed shares up to a high of $350 in spring of last year, yet shares fell to the $200 mark in October amidst a selloff in the general market, and certainly in high-beta names.
This came after the company posted a 25% increase in second quarter sales to $261 million, as it was promising that the company posted operating profits of $18 million for the quarter. Commanding a roughly $7.5 billion enterprise valuations around the $200 mark, shares traded at 7 times sales, which marked a premium compared to established pharmaceutical names. This premium came amidst superior sales growth, but lower margins, although some improvements were made on this terrain.
While a near 50% pullback from the highs looked interesting, it in itself was a reaction to strong momentum seen beforehand. Moreover, shares of the sector at large were under pressure amidst the success of new weight-loss drugs, causing fear among certain medical device companies. Amidst all this, appeal has improved a great deal, but it was not enough to call the shares cheap.
Shares of Penumbra joined the rally (in high-beta names) since the fall, and recovered from the $200 mark towards $270 per share in recent weeks. Shares have now sold off towards the $240 mark in response to the fourth quarter earnings release.
After reporting a 27% increase in third quarter sales to $271 million early in November, momentum even accelerated in the fourth quarter. In February, the company reported a 29% increase in fourth quarter sales to $285 million, with full year sales reported up 25% to nearly $1.06 billion. In the seasonally stronger quarter, GAAP operating profits rose to $38 million, with full year GAAP operating profits reported at $80 million. For the year, the company reported GAAP earnings of $91 million, equal to $2.32 per share, actually slightly exceeding adjusted earnings.
The 39 million shares outstanding represent an equity valuation of $9.4 billion at $240 per share, as this valuation includes a $289 million net cash position. This values operating assets at $9.1 billion, equal to about 9 times sales and a roughly 100 times earnings multiple.
Some changes in this valuation are to be expected for the better as the company guides for 16-20% revenue growth for 2024, with revenues seen at a midpoint of $1.25 billion. This is slower than the >20% growth rates investors have gotten used to, and more so, growth is set to be stronger in the second half of the year, posing a risk to the guidance of course.
Gross margins are seen up 100-150 basis points, with adjusted operating margins seen up 100-200 basis points. As non-GAAP operating margins were reported around 9.5% of sales in 2023, this suggests about $35 million in operating profit improvements, having the potential to boost after-tax earnings by about $0.70 per share. Even in such a scenario, valuations remain very demanding.
The reality is that Penumbra, Inc. ended 2023 on a solid note in terms of growth and shows real operating leverage. While fourth quarter revenues came in just shy of consensus estimates, a 29% growth rate is nothing to be ashamed about.
While more growth and margin expansion is still to come in 2024, investors are arguably not pleased with the pace of the improvements on the sales and margin front, certainly as growth decelerates to an expected pace sub-20%.
Amidst all this, valuations remain demanding by all means, despite the spectacular expected earnings improvement seen in 2024. The issue is that valuations are still quite high, as the slower than anticipated sales growth number for 2024 do not instill much confidence. While operating leverage is expected, the overall valuations remain very demanding, too demanding to provide fundamental support here just yet.
Given all this, I continue to follow Penumbra shares with great interest, yet I feel no urge to buy the latest setback just yet, as slower growth does not instill a lot of confidence here.