PeopleImages/iStock via Getty Images
PeopleImages/iStock via Getty Images
In the fall of last year, I concluded that it was time to "back" up shares of Globus Medical, Inc. (NYSE:GMED) after its shares had seen a lackluster performance. The company had a strong track record in the spine market, and synergies on a deal with NuVasive appeared set to pay off.
Shares have seen a decent move higher, like the rest of the market, but the issue is that the recent 2024 earnings guidance came in a touch light, with sales and earnings growth limited by greater than expected dis-synergies.
This combination in itself is not too enticing, yet GMED shares remain cheap enough (based on sales multiples) to drive returns from here, but some real earnings execution would be welcomed here.
Globus Medical is a manufacturer of musculoskeletal implants which are used for patients suffering from spine disorders. The company went public just over a decade ago at $12 per share, as the combination of growth, margins, and balance sheet strength looked solid.
With the passage of time, the company has broadened its product portfolio to other categories of the spine market as well, as the business was actually taking some market share away from larger (and less focused) competitors such as Johnson & Johnson (JNJ), Medtronic plc (MDT), and Stryker Corporation (SYK), among others.
The business grew sales from about $400 million in 2012 to a billion dollars a decade later, yet margins have not really improved, in fact, the opposite is the case.
An $80 stock early in 2023 fell to the $60 mark overnight about a year ago, with the company losing $2 billion in value in response to a $3.1 billion deal being announced for NuVasive. The transaction was set to add $1.1 billion in sales, to essentially double the revenue base of the business.
Besides the relatively compelling sales multiple (with Globus commanding a $7 billion enterprise valuation ahead of the deal announcement), investors could look forward to an anticipated $170 million in synergies in year three post-closing. This could, in fact, allow earnings per share to improve from $2 to $3 per share by my math if executed upon.
The transaction with NuVasive closed in September of last year when shares traded around the $50 mark. Shares actually fell further to the $45 mark following the release of the third quarter results, a quarter which included a month of NuVasive contributions.
Third quarter sales rose 51% to $383 million, largely the result of the deal, although that 11% organic growth was pretty solid as well, even as it slowed down from the organic growth pace reported in the first half of the year. For the year, the company stuck to a previously issued $2.30 per share guidance, of course, those are adjusted earnings.
Trading at $45 in the fall, the valuation fell to $6.3 billion, as that even included a minimal cash position. With pro forma sales trending comfortably over $2 billion a year, sales multiples came at less than 3 times sales, non-demanding multiples by all means. Trading at 18 times adjusted earnings pegged at $2.30 per share in 2023, that valuation looked reasonable, yet I believed that a roadmap for earnings of $3 per share should be in the work upon the realization of synergies, creating a compelling situation amidst an unleveraged balance sheet.
After tipping Globus Medical as a pick in my premium subscription service, shares have risen nearly by a quarter to $56 per share here, although truth be told is that the market at large has seen solid gains as well.
By early January, Globus Medical announced preliminary fourth quarter sales at $615 million, up 124% on the year before, with growth largely driven by the deal with NuVasive, as organic growth was reported at 10% and change.
The company did outline a 2024 outlook, calling for sales between $2.450 and $2.475 billion, which looks reasonable, yet adjusted earnings between $2.68 and $2.70 per share are seen as a touch soft. While the sales guidance suggests modest growth from a pro forma revenue base of $2.40 billion, it includes dis-synergies to the tune of $150 million, a bit bigger than previously thought, with organic growth otherwise seen at high single digits.
In February, the company reported its definitive fourth quarter results, with revenues coming in a bit higher than the preliminary results, with revenues reported at $616 million. Adjusted earnings came in at $0.60 per share, with the gap from GAAP earnings being substantial (with GAAP earnings reported at just $0.11 per share), although most of the adjustments look fair and mostly deal-related.
With 139 million shares having recovered to $56, the Globus market value has recovered to $7.8 billion. This includes a $593 million cash position, yet excludes about $417 million in convertible loans as well, as well as some acquisition-related liabilities.
Needless to say, valuation remains non-demanding at about 3 times sales, as the company trades at 20-21 times adjusted earnings, yet the outlook feels a bit soft. After all, from adjusted earnings of $2.32 per share in 2023, accretion is expected at a midpoint of $0.37 per share. That suggests about $70 million in pre-tax earnings improvement, yet if we adjust for the expected synergies from the NuVasive deal, that suggests no organic earnings growth on the back of the projected dis-synergies.
The truth is that while shares are still far from expensive, and real potential is there, it is the 2024 guidance which comes in a bit soft, all while the shares have seen a decent recovery from the October lows.
Amidst all this, I am performing a balancing act as Globus Medical, Inc. earnings growth is slower than thought, yet the overall potential in the shares is seen here as a $3 earnings per share number that should still be possible for 2025. Amidst all of this, I remain a holder of the stock, yet willing to take some profits if shares might rise to the $60s, as I am not yet convinced about Globus Medical, Inc.'s underlying earnings growth.