It is a fact that Globus Medical (NYSE:GMED) maintains strong positive cash flows and yet it does not pay dividends. Rather than putting investors off, this should encourage them to find out more about this company that has successfully grown its revenues from quarter to quarter while maintaining almost flat company expenses. This article will show that it takes more than paying dividends to make any company worth your investment as Globus has a lot of catalysts that will drive shareholder returns in the future.
Getting to know Globus Medical
Globus is a company that operates in the Medical Devices industry with its focus on design, development and commercialization of various products geared toward helping spine disorder patients in their recovery journey. It was established in 2003 with headquarters in Audubon, Pennsylvania.
The company's products come in handy during thoracolumbar, interbody fusion, sacral and cervical procedures. It has been helpful in improving the rate of successful treatments of patients diagnosed with deformative, traumatic and degenerative conditions, including tumors.
The products offered by the company falls under two segments: Innovative Fusion and Disruptive Technologies segments. While the former services a broad range of spinal fusion surgical procedure needs, the latter offers services that improve the already existing procedures for such surgical procedures.
Now, with the Disruptive Technologies products, the company's management has proven its expertise when it comes to identifying a prospective market, even with its attendant risks. This is based on the fact that with these products meaning a shift in the known spine disorder treatments, physicians and patients are sure to go for it due to its attendant benefits but it was not going to happen with the flash of an eye. However, knowing that the technology improves surgical results, attracts minimal costs and limits patient's recovery period and hospital stay, the company's management expects increased demands for the applications in the nearest future.
Catalysts to drive growth
Revenue growth: In the last few quarters, Globus has continued to grow its revenue. Revenue for fourth quarter of fiscal 2012 came in at $100.5 million and increased to $105.0 million in first quarter of fiscal 2013 and $107.0 million in the second quarter of 2013.
Almost flat SG&A expenses: It is a common sight to see most companies' expenses increase as revenue increases. This is not the case with Globus as its company expenses remained almost flat even with the increase in revenue.
Flat cost of revenue: In the first quarter of fiscal 2013, the company reported $23.49 million as total cost of revenue and $23.50 million for second quarter of fiscal 2013. This shows that bringing in revenue is not expensive for the company.
Improving gross profit: With the company maintaining flat company expenses and cost of revenue, the gross profit will continue to improve.
Strong balance sheet: I know of several companies that pay dividends and yet have negative cash flow. Globus has a strong balance sheet with no debt in the last two fiscal periods. As at fiscal year 2012 ended December 31, 2012, the company had more approximately $212 million in cash.
Significant growth in the disruptive technology segment: The Innovative Fusion segment makes up a good percentage of the company's revenue at approximately 62%. The tide is beginning to turn as the fiscal year 2012 recorded a 38% increase in demand for products in the DT segment while the IF segment recorded 6%. This confirms management's expectations of increase in demand for DI products.
Proposed expansion: The company currently derives most of its revenue from its U.S. customers with only 8.3% coming from international markets. The company's management has set plans in motion to further expand its footprint in the international scene in order to fuel revenue and income growth in the coming quarters.
Several new products in the pipeline: With the 32% growth recorded in the DT impacted by increase in product offerings, the company is fueling this growth further with new products that are in different stages of development.
Statement Of Operations (In $ Millions)
Cost of Revenue, Total
Selling/General/Admin. Expenses, Total
Apart from the aforementioned, there are other areas the company needs to work on in order to further enhance the company's growth. Although it has other products in the pipeline, if it fails to develop products that are different from what is already obtainable in the market, in terms of design and functions, it might not make much difference. With slightly different and more functional products, the company will be able to capture a fair share of the market it operates in.
Also, if Globus develops and launches better products than its competitors, it will go a long way to drive the pricing of the products upwards as the demand grows more than supplies. With this, the company will be able to grow both its top line and bottom line.
Globus operates in a highly competitive industry with a handful of small and large corporations in play. The big players include Zimmer Holdings (NYSE:ZMH), Medtronic (NYSE:MDT), a division of Johnson & Johnson (NYSE:JNJ) and Stryker (NYSE:SYK). Its comparable peer in terms of market capitalization and area of specialization is NuVasive Inc. (NASDAQ:NUVA). NuVasive has consistently strung three quarters together in terms of top line growth, only missing on the bottom line in the second quarter of fiscal 2013. With its expansion into the international market, the company is steadily working its way toward outgrowing the market it operates in.
It is not the best of times for Johnson & Johnson as the case of its recalled defective artificial hips continue to be in the news. Just recently, the large corporation is expected to spend over $3 billion as settlement for claims concerning its metal-on-metal hip implants, with each individual getting over $300,000 as claims.
On the other hand, Medtronic has given the indication that it does not want to miss out on the benefits accruing from the projected growth in the health-services industry. With the company's acquisition of Cardiocom, provider of monitoring services designed for patients with chronic diseases, Medtronic's expansion into the health-services industry will help it connect directly with its target audience. With the ever increasing number of aged individuals in the U.S., the company's investors are in for higher returns from this new business model.
Listed below are some of factors that could hurt Globus Medical's profitability. They are:
- Reliance on third-party sales
- Limited customers
- Continued increase in price competition
- Uncertainty of gaining reimbursements from Centers for Medicare & Medicaid Services.
- Inability to gain clearance or approval of any of its pipeline products.
- Prolonged timeline of gaining approval for newly developed products.
For companies that sell products instead of services, delving into international waters usually means more expenses. However, with the currently decreasing cost per volume shipping costs, Globus will experience reasonable reduction in the cost of shipping its products for international sales. This decrease in shipping costs is necessitated by fierce competition among shipping companies which resulted in supplies being higher than demand and we all know what that means.
With Globus management opting to invest its free cash flows into research and development instead of paying dividends, investors can be sure of higher returns in the long term when management decides to pay dividends. With the planned expansion that is sure to result in continually growing revenues, earnings and profit margin, I believe the company will end up paying significant dividends against the minuscule amount paid by some companies in the name of dividends.
With the company known to increase its gross margins proportionally with sales, even as expenses and cost of revenue remain almost flat, there is no need reiterating the fact that Globus makes a good buy in long-term value. This is especially if you consider that you won't be paying for these massive catalysts you will enjoy in the near future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.