Merit Medical: Reasonably-Priced Execution, With M&A Upside

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Small headdress interventional and diagnostic instrumentality shaper Merit Medical (NASDAQ:MMSI) is ne'er going to beryllium among nan much breathtaking names successful med-tech, but that’s good – a good dependable execution and stock value capacity to beryllium plentifulness exciting, and Merit has continued to present connected that. Merit’s humble mid-single-digit gross maturation prospects do transportation nan consequence of nan banal falling into nan “med-tech nary man’s land” that I’ve talked astir successful reference to AngioDynamics (ANGO) and Enovis (ENOV) successful nan past, but I do deliberation location could beryllium immoderate M&A optionality present some arsenic a purchaser and a seller.

Up astir 10% from my past article, Merit has outperformed nan S&P 500 and nan broader med-tech abstraction by much than 20%. As I tin reason for a stock value person to $80, there’s still capable upside here to merit a person look, and I for illustration nan company’s leverage to some ongoing process measurement betterment successful nan U.S. and maturation successful overseas markets.

A Modest Operating Beat To Close The Year

Merit’s 4th fourth results were okay. While nan bottom-line hit of $0.12/share mightiness propose much than conscionable "okay”, it was a lower-quality tax-driven hit and halfway operating results were person to statement than that bottom-line consequence would suggest. I’d besides statement that nan magnitude of nan gross hit was smaller than it’s been for respective quarters.

Revenue roseate much than 8% successful integrated changeless rate terms, beating by 1% aft respective quarters of 4% to 5% thumps comparative to nan Street. The halfway Cardiology business grew almost 9% (Endoscopy was down much than 5%), pinch 16% maturation successful nan OEM business, astir 10% maturation successful nan Cardiac business, and astir 9% maturation successful Peripheral, while Custom Solutions was up astir 2%.

U.S. income roseate astir 5%, which looks astir connected par for halfway underlying maturation successful nan med-tech abstraction (based connected nan results reported by companies for illustration Abbott (ABT), Johnson & Johnson (JNJ), and Medtronic (MDT)), and I deliberation those are applicable comps arsenic overmuch of Merit’s gross comes from facilitating procedures (guidewires, sheaths, trays, catheters, and truthful on). OUS income roseate much than 12%, pinch China up precocious single-digits contempt headwinds from value-based pricing.

Non-GAAP gross separator declined 60bp twelvemonth complete twelvemonth but improved by much than a constituent from nan anterior 4th to 49.5%. Input costs and logistics ostentation stay important factors, though operation has helped offset this to immoderate extent.

Operating income roseate 8% (non-GAAP), which separator up 40bp yoy and 170bp qoq to 17.8%. Operating income hit by astir $0.02/share, pinch nan remainder of nan EPS hit driven by a overmuch little taxation rate.

Guidance for 2023 was accordant pinch Street expectations. Management guided to 5% to 6% gross maturation pinch a midpoint conscionable supra Street expectations. Likewise pinch separator and EPS guidance, pinch nan midpoint of nan EPS scope ($2.845) conscionable up of nan anterior sell-side mean of $2.83 for 2023.

Leverage To Ongoing Normalization

As a “facilitator”, I do expect Merit to use from continued normalization successful process volumes. Multiple companies targeting nan cardiology abstraction (Abbott, Boston Scientific (BSX), et al) are pointing to improving conditions for interventional cardiology and electrophysiology procedures, and hospitals are surely motivated to get their cath labs moving backmost to normal, arsenic this is simply a “cash register” session for astir facilities. That should successful move thrust improved request for a scope of Merit products successful nan Peripheral, Cardiac, and Custom Solutions businesses.

I besides proceed to spot bully request for neurovascular and peripheral procedures astatine Inari (NARI) and Penumbra (PEN), and Merit tin participate location done its OEM business (which counts Inari and Penumbra among its customers).

Procedure measurement normalization besides applies to nan oncology space, and Merit has done good present connected nan backmost of products for illustration SCOUT for tumor localization. On that subject, I deliberation it’s worthy pointing retired that nan institution received FDA Breakthrough Device nickname for its caller SCOUT MD surgical guidance system.

I don’t expect SCOUT MD to beryllium a game-changing merchandise for Merit, but I for illustration what it says astir nan company’s ongoing committedness to innovation. As I’ve discussed before, Merit guidance is pivoting toward much proprietary therapeutic devices, and while this description requires elevated R&D and much clip (clinical tests and truthful on), nan rewards successful position of pricing power, measurement growth, and margin/profit enhancement make it much than worthwhile.

I proceed to judge that nan company’s Wrapsody AV entree prosthesis tin beryllium a meaningful driver for nan company, and while commercialization is still apt 2 years aliases truthful away, I expect to spot much merchandise improvement on nan lines of Wrapsody – caller solutions to objective issues (in this case, AV fistula patency) that whitethorn not beryllium large capable to pull nan attraction of nan biggest players, but connection capable gross to make it worthy Merit’s time.

M&A Remains A Wild Card

Merit has lived up to its promise to beryllium much selective and prudent pinch M&A, but I do judge guidance would emotion to do immoderate deals astatine nan correct price. Companies ranging from Abbott to AngioDynamics to Boston Scientific and Integra (IART) person shown that you tin do meaningful deals for a sub-$100M value tag, and I deliberation location are opportunities complete nan adjacent fewer years to adhd meaningful gross this way.

I could besides spot Merit arsenic a seller. There person been rumors disconnected and connected of M&A liking successful Merit, pinch astir of those rumors pointing to backstage equity arsenic imaginable buyers. The past specified rumors were almost a twelvemonth agone (at a low-$70’s price), but pinch a CEO not precisely a young man, I could spot a transaction astatine nan correct price.

The Outlook

Given that I americium a believer successful products for illustration Wrapsody and SCOUT MD being difference-makers for Merit, arsenic good arsenic management’s committedness to proceed processing much innovative and/or disruptive caller products, I’m assured pinch a modestly higher-than-average gross outlook. I’m expecting semipermanent gross maturation astir nan 6% range, and my ’26 gross estimate is astir 5% supra wherever nan Street’s astatine now.

I expect ongoing separator improvement, pinch astir 150bp/year of separator betterment complete nan adjacent 5 years, taking non-GAAP operating margins into nan low-20%’s. I do judge FCF margins could beryllium abnormally precocious successful nan adjacent word arsenic moving superior build reverses, but complete nan agelong word I expect betterment towards nan mid-teens, driving high-single-digit normalized growth.

Discounted rate travel doesn’t really support a bullish thesis connected Merit, but that’s much communal than not for smaller med-techs. Using my maturation and margin-driven aggregate approach, I judge a 4x guardant gross aggregate is still appropriate, and that supports a adjacent worth a small supra $80 based connected my FY’23 gross estimate.

The Bottom Line

As I’ve said earlier successful reference to Merit and akin companies, sentiment remains a consequence arsenic slower-growing mini med-techs often struggle to gain charismatic multiples – I retrieve from my sell-side days talking to buy-side managers who wouldn’t moreover see med-techs that didn’t person double-digit (sometimes 20%-plus) gross maturation rates.

Still, I deliberation Merit is executing good and not afloat weighted connected that basis, and this is simply a worthwhile sanction to see for investors who tin beryllium happy pinch a little move med-tech play that still has meaningful self-improvement potential.

To publication my caller articles connected Abbott, AngioDynamics, Boston Scientific, and Integra LifeSciences, please click here (ABT), here (ANGO), here (BSX), aliases here (IART).

Stephen Simpson is simply a freelance financial writer and investor. Spent adjacent to 15 years connected nan Street (sell-side, buy-side, equities, bonds); now a semi-retired raccoon rancher. That past portion isn't wholly true. Probably.