I last wrote about Given Imaging Ltd. (GIVN) in July 2011 when I postulated that Given was overvalued at $20.35 per share. The shares now trade at $16.00~ and I believe they remain overvalued. In the past 52 weeks, the shares have traded between $12.14 and $19.95. The analysts surveyed by The Wall Street Journal have target prices in the $21 to $22 range. GIVN is a Yokne'am, Israel based manufacturer of medical diagnostic equipment.
Back in October, there were reports that the company was interested in a merger or being acquired. This announcement gave the share price a short term boost. Then in January, the company announced that it was giving up on a merger or being acquired and that it would focus on implementing its operational plan. This caused the share price to drop precipitously. Subsequently, in January, Bloomberg reported that Permira Advisors LLP is considering the acquisition of a stake in Given and that Discount Investment Corp is in talks to sell all or part of its 45.5 percent stake in Given.
Given is seeking regulatory approval in Japan for its PillCam Colon 2, as an alternative to the more traditional colonoscopy. In August, it announced that it would not market the product in the US for colon cancer screening tests, which reduced the product's potential market from $4 billion a year to $1.7 billion. Japan gives the company great long-term potential, because its health system is one of the most developed in the world and almost equal in value to the US market.
Revenues were $48.7 million in the fourth quarter of 2012, compared to $48.5 million in the fourth quarter of 2011. Gross margin in the 4th quarter of 2012 was 74.6%, compared to 77.4% in 4Q11. Operating profit was $3.6 million for 4Q12 compared to $4.9 million in 4Q11. Net income decreased to $0.16 per share in 4Q12 from the year-ago 4Q11 EPS of $0.18.
Revenues were $180.4 million in FY12 as compared to $178.0 million in FY11. The gross margin declined by 50 basis points to 76.2% from 76.7% in 2011. However, the operating margin expanded to 7.7% from 7.3%. For the year, EPS was $0.46 as compared to $0.38 in 2011. Cash from operations expanded to $27.8 million in 2012 from the prior year's $19.9 million. Cash, cash equivalents, and short-term investments 93.8 million on December 31, 2012 compared to $89.1 million at the end of 2011. Long term debt is only $0.1 million.
The company expects that 2013 revenues will be between $195 million and $205 million. The analysts surveyed by Thomson Reuters provide 2013 revenue estimates in the $192.00 million to $199.2 million range. On a GAAP basis, the company estimates EPS between $0.55 and $0.63.
With the exception of 2012, the y-o-y growth in revenues has remained in double digits. If the company hits the low end of its guidance, 2013, sales growth will be in the high single digits for the year. EPS growth on a y-o-y has been wildly unstable. For the past five years, common equity has grown at the rate of 10.8%. Analysts forecast EPS to grow at the rate of 24.5% over the next 3-5 years. My own estimate is for EPS growth to be a more moderate 13.2%.
Given has virtually no long term debt and a current ratio of 4.3. Working capital is more than sufficient to meet normal operational requirements. The company generated about $20.9 million in free cash flow.
Over the long term, receivables turnover ratio has remained in the mid-single digits with a slightly rising trend.
At the current PE multiple of 35.7 Given is well above the industry median of 21.2. The forward multiple of 22.9 puts this stock in line with the industry. Based on my expectations for EPS growth at the rate of 13.2%, I think a more appropriate PE multiple for GIVN would be 16.3.
On a price to book basis, it would appear that the company is selling in line with the industry. By my own estimates, the PB ratio also appears to be high. Again, comparing the company's PS ratio with the industry, the share price appears to be high and my own estimate of fair value based on PS is even less.
I wrote in July that Given Imaging was overvalued and my opinion has not changed. Neither the company's level of profitability nor the anticipated growth justifies the high valuation. The company may be a potential takeover target as the controlling shareholders seek to raise cash to salvage their other business interests. On a stand-alone basis, I would be very cautious before buying shares of GIVN.