Rasi Bhadramani
Late September, I believed that there were a lot of questions in the case of Masimo (NASDAQ:MASI) following its “diworsificaion” deal for Sound United last year, a advance which caused a lot of concerns among investors, wondering if the company moved away from its core expertise.
Concerns rose advocate this year as the core operating business was suffering from lower demand due to de-stocking of inventory through the system, creating a lot of moving parts and questions marks, although that some tiny green shoots might be emerging here as well.
Non-Invasive Medtech
Founded in the 1980s, Masimo has focused on the development, manufacturing and marketing of non-invasive monitoring systems, with key expertise seen in the measurement through motion and lower perfusion arterial blood oxygen saturation and pulse rate monitoring. These are relatively simple tasks in stable conditions, but if patients are moving (or are on the advance) traditional practices yield unreliable results.
After going public at $17 in 2007, shares broke the $100 mark a decade later, and hit a high of $300 in 2021. This was based on a business which reported $1.2 billion in sales and posted earnings of around $4 per share, translating into nosebleed valuations around $300 per share.
Shares fell to the lower $200s in spring of 2022 amidst a reversal of sentiment in momentum names, and fell advocate to $135 in an overnight advance as the company acquired Sound United in a $1.025 billion deal.
Despite the relative modest price tag, the value of the firm was cut by some $5 billion, as investors believed that the deal was too far removed from core expertise, and likely feared distraction to the core business with a medical player moving into consumer sound.
The deal was set to add a billion in sales and $125 million in EBITDA, which made that I bought the initial dip in the $130s, selling out the shares after they recovered in the spring of this year. 2022 sales grew to $2.04 billion, due to the deal, with core healthcare revenues up 8% to $1.34 billion, revealing a $700 million contribution by Sound.
Earnings were reported at $459 million, as net debt looked reasonable at $740 million. The 2023 guidance, calling for sales of $2.44 billion (comprised out of $1.46 billion in healthcare revenues and nearly a billion in Sound revenues) looks reasonable. At the same time, it was a $4.75 earnings per share guidance which felt a bit soft, prompting me to cut my position in the $170s this spring, as shares nearly hit the $200 mark around the same time.
2023 – Downhill
In May, Masimo reported first quarter sales of $565 million as GAAP earnings were more than cut in half to $0.39 per share, both looking a bit soft, although that the company maintained the full year guidance. Moreover, the company got involved with a very public proxy fight with Politan Capital Management.
In July, the company posted very soft preliminary second quarter sales of $455 million, with weakness seen in both segments, a number which was formally reported in August, falling way short of the $565 million number in the second quarter of 2022. Adjusted earnings per share were cut again more in half, now down to $0.62 per share.
The full year sales guidance was cut by nearly $300 million to $2.15 billion, with adjusted earnings seen down $1.30 per share to $3.45 per share. The 54 million shares of the business were valued at around $5 billion, as net debt was stable at $738 million, with investors worried about lower earnings power and perhaps having some leverage concerns as well.
Third quarter sales were seen between $475 and $525 million, with earnings seen between $0.50-$0.64 per share, with the situation being quite fluid amidst a shortfall in both segments, management distraction and general uncertainty.
With earnings power around $2 per share and uncertainty being high, it was clear that management still had some to demonstrate at $94 in September, making me upbeat, but cautious to pull the trigger amidst many uncertainties and a serious shortfall in the results.
Today – $94 Again
Fast forwarding two months in time, shares are still trading at $94 per share, trading dead flat, but that is not before shares hit a low of $75 per share in the period between.
The news flow has been quite substantial as well. In October, Masimo announced that the FDA granted clearance for Masimo´s ORi for non-invasive and continued parameter to furnish insight into hyperoxia under supplemental oxygen. Later that month, it was the US International Trade Commission which recommended a limited exclusion order for infringing Apple Watches, violating Masimo´s patents regarding light-based pulse oximetry functionality.
The company furthermore announced a new board member in the person of Rolf Classon early in November. This was followed by a collaboration agreement with GE HealthCare (GEHC).
A Mixed Third Quarter
Early in November, the company reported third quarter sales of $479 million, coming in towards the lower end of the guidance range, with healthcare revenues of nearly $308 million down minimally from a $327 million number last year, and notably consumer revenues coming in soft. Contrary to the softer revenue number, adjusted earnings came in at the high end of the range, at $0.63 per share, needed as net debt remains stubbornly high at $786 million.
The company guided for fourth quarter sales at $551 million, plus or minus $25 million, with healthcare revenues seen between $320 and $345 million, and non-healthcare revenues seen between $206 and $231 million. Adjusted earnings are seen at $0.84 per share, plus or minus ten cents. While the sequential pickup in sales looks comforting, note that revenues came in at $617 million in the final quarter of 2022.
The commentary however was comforting as the company sees a transition from the Covid-19 conditions, with customer behavior and buying patterns moving to pre-pandemic trends. This is supposed to set up the company up for a strong 2024, although that this has not been quantified by management here.
And Now?
Soon after the release of the third quarter results, Masimo furthermore obtained FDA clearance for the W1 medical watch for prescription and OTC usage.
The impact of this is hard to gauge, of course, but it seems that some positive news on the corporate front has been visible here recently. I appreciate the net impact of all of this, although that the third results and fourth quarter guidance imply some continued stagnation, in fact declines, albeit that 2024 should benefit from secular growth, normalization of (demand) trends and easy comparables.
Given all this, I am very anxious to keep learning about the prospects of the shares, but see no reason to get involved here just yet, as the overall valuations remain quite demanding, even if they are cheap based on historical standards.
