In March, I believed that Merit Medical Systems (NASDAQ:MMSI) was a solid performer yet fully valued after the company issued a non-inspiring outlook for 2024. This made me cautious amidst premium multiples and an upcoming CEO transition. With the business having started the year on a solid note, and a nice bolt-on deal being announced, I'm upbeat on the long-term prospects and track record of the business, although it comes at a price.
Diversified Medical Devices
Founded in 1987 by Fred Lampropoulos, an inventor with more than 200 medical device patents in his name, Merit went public just three years later. With the passage of time, the company has grown to over a billion-sales base, derived from serving more than 13,000 customers across the globe with products within 200 medical product categories.
The company is pretty well diversified, split pretty equally between US and international markets, focusing on peripheral intervention, cardiac intervention, endoscopy and custom procedural solutions.
It's the composition of organic growth, R&D and dealmaking which made that a $1 stock in the late 1990s has risen to $75 this spring, creating incredible value for long-term investors.
Premium Valuations
Late in 2023, investors had to digest some news as founder and CEO Fred Lampropoulos announced that he was preparing for his retirement, serving the company until the end of 2025.
For the year 2023, the company had seen a solid operating performance. Revenues rose by 9% to $1.25 billion, with GAAP operating income of $124 million, resulting in margins around 10%. GAAP earnings of $94 million were equal to $1.62 per share, with adjusted earnings posted at $3.01 per share after a dozen adjustments. Given the nature of these items, the realistic earnings number likely came in somewhere between both numbers.
For 2024, the company guided for sales to grow by just 4%-5% to $1.32 billion, with adjusted earnings seen up 9-11% to $3.28-$3.35 per share, as the company guided for modest margin gains. Trading at $75, a $4.35 billion equity valuation, and $4.6 billion enterprise valuation, valued the business at 3.5 times forward sales. Assuming realistic earnings around $2.50 per share, shares traded at a demanding 30 times earnings multiple.
This seems justifiable on the back of the 2026 plans. Besides organic growth of around 5% per annum, the company aims to grow adjusted operating margins from 18.2% in 2023 to 20%, or higher.
Some Upbeat News
Toward the end of April, Merit Medical reported a near 9% increase in first quarter sales to $323 million, with organic growth rates of 7% being very decent. Adjusted operating margins in the quarter were up 120 basis points to 17.3% of sales, driving a 19% increase in adjusted earnings to $0.77 per share.
GAAP earnings improved to $0.48 per share, with most of the discrepancy being the result of amortization charges, making that realistic earnings are likely closer to adjusted earnings than GAAP earnings.
Following the stronger than expected start to the year, the company maintained full-year guidance, which now looks somewhat conservative. Net debt was reported at $240 million, as the share tally now stands at 58 million and some shares.
In May, the company announced that company veteran Joe Wright was appointed president, immediately. This is comforting in the light of investors with an insider taking on management roles, boding well for a smooth integration.
With 58 million shares trading at $85, the market value of the firm stands at nearly $5 billion, for a $5.2 billion enterprise valuation. This values the business at around 4 times sales.
Another Deal
On the first day of July, Merit announced an asset purchase of EndoGastric Solutions in a $105 million cash deal. The deal is set to expand the product portfolio with minimally invasive solutions for patients suffering from gastroesophageal reflux disease. With a $30 million revenue contribution, the purchase is valued at 3.5 times sales, a modest discount compared to the own valuation.
While modest dilution is seen at closing, with the midpoint of the current year earnings guidance cut by around 5 cents, the company sees accretion to margins, non-GAAP net income and non-GAAP earnings per share in the first year post closing. Unfortunately, this claim has not been quantified.
Pro forma net debt will jump to $350 million, but still be very manageable. The deal looks solid, adding just over 2% to pro forma sales, at fair revenue multiples, but undoubtedly a somewhat less impressive margin profile compared to the own valuation.
And Now?
The truth is that I'm quite upbeat after a solid first quarter and interesting bolt-on deal, yet since March, shares have risen by double-digit percentages. This makes that expectations have only risen further, and while the start to the year has been solid, this does not rhyme with a >30 times earnings multiple, even if margin gains might be delivered upon.
Merit remains a very interesting business, certainly as it continues to post organic growth and pursue bolt-on dealmaking, but at current levels much good news has been priced in, perhaps a bit too much to see appeal readily available.