These are frustrating days to be a med-tech investor. Companies with high-quality products and growth are generally trading at pretty extreme multiples, while the low-multiple companies tend to be those with some pretty serious operational/competitive issues. AngioDynamics (ANGO) seems to be somewhere in the middle - the company's underlying business is muddling along through some challenging times in its addressed markets, while the valuation isn't quite in clear value range.
Signs Of Progress This Quarter
AngioDynamics doesn't really have the sort of business that's going to blow away the quarterly estimates, and given some of the company's challenges over the past year or so, another solid result in hand is good enough for now.
Revenue rose 50% as reported, with underlying organic growth of about 3%. Growth was skewed outside the U.S., as the company matched 1% domestic growth with 22% (constant currency) OUS growth. Growth was led by the oncology/surgery business (up 12%), while vascular was up 1%.
The company's operating results were a little more mixed. Reported gross margin fell about 650 basis points, but the company saw adjusted operating income rise 63%, with operating margin improving about 70bp. For a company that I think is just starting to get back on pace (after a major acquisition and significant change in management philosophy), that's a solid performance.
Details Look Clean, But More Growth Is Needed
I think AngioDynamics should be applauded for the incredible level of detail management provides about the business. At a minimum, it makes it relatively easier to see what is, and is not, working for the company.
To that end, vascular access stands out as a weak spot. Procedure volumes have remained relatively soft, and most companies not named Covidien (COV) are seeing softer performance. That said, the 4% decline in AngioDynamics' PICC business concerns me a bit with respect to the company's share against Bard (BCR). On the other hand, I think the company's varicose vein platform is doing okay relative to the market (possibly including gaining on Covidien).
And there's the obligatory NanoKnife mention. NanoKnife was flat this quarter at $3.2 million. While investors are understandably excited about the long-term potential of this system, it's going to take a lot of time and patience for that potential to develop - an indication for an application like pancreatic cancer is probably a 2015 event. What's more, investors should consider the Accuray (ARAY) or MAKO Surgical (MAKO) examples before getting too excited - introducing new technology can be a tricky process even when that technology offers advantages over the current standards of practice.
On a more near-term basis, I'd be paying attention to the company's BioFlo anti-clotting technology. The company launched a BioFlo PICC product this past quarter, and further expansion of this technology could offer real competitive differentiation and improved sales (not to mention incremental margins).
The Bottom Line
AngioDynamics recently scored a meaningful counterpunch on Bard in some patent litigation, and the acquisition of Vortex Medical earlier in the quarter shows that the company is not about to stop its long-term strategy of selective tuck-in deals. All of that said, the valuation case is still a little challenging.
AngioDynamics' EV/sales multiple is below historical norms for small med-tech companies, but then so too is the company's growth rate and operating margin. Looking at free cash flow, if the company grows its revenue at a long-term rate around 6% and lifts its free cash flow margin into the mid-teens, the resulting 12%-13% free cash flow growth suggests a fair value around $14. That's about 25% undervaluation today, and I usually look for more before buying into smaller med-tech companies. That said, the company does look like a decent prospect for patient investors, and particularly those who believe in the long-term potential of the NanoKnife platform.