Share Price: $171.30
Intrinsic Value: $203.55
Buy Below: $142.48
Atrion Corporation (ATRI) develops and manufactures ophthalmology, cardiovascular, and fluid delivery devices primarily for medical applications in the United States and internationally. The company manufactures soft contact lens storage and disinfection cases; and the LacriCATH line of balloon catheters used in the treatment of nasolacrimal duct obstruction in children and adults. It develops the MPS2 Myocardial Protection System, a proprietary technology delivering fluids and medications to the heart during open-heart surgery; cardiac surgery vacuum relief valves; Retract-O-Tape silicone vessel loops; inflation devices for balloon catheter dilation, stent deployment, and fluid dispensing; and Clean-Cut rotating aortic punch and PerfectCut Aortotomy System, both of which are used in heart bypass surgery.
Atrion manufactures various intravenous fluid delivery products comprising medical tubing clamps; swabbable luer valves; and luer syringe check valves and one-way valves. It produces inflation systems and valves used in marine and aviation safety products; one-way and two-way Breather valves for use on electronics cases, munitions cases, pressure vessels, transportation container cases, escape slides, and other medical and non-medical applications; and a line of products designed for safe needle and scalpel blade containment, as well as the ACTester product line consisting of instrumentation and associated disposables used to measure the activated clotting time of blood.
The company also provides contract manufacturing services for other original equipment manufacturers of medical devices; and owns and maintains a 22-mile high-pressure steel pipeline in north Alabama, that is leased to an industrial gas producer that transports gaseous oxygen to its customers. It sells its products through a sales force. The company was founded in 1944 and is headquartered in Allen, Texas. Source: Yahoo Finance
We aren’t getting any younger: the elderly (65+) population in the United States is projected to increase 37% by 2021. Atrion Corporation (ATRI) is a low-risk medical supply company that is positioned to benefit from the increase in demand for healthcare services. Since Atrion is nearly fairly valued using historical growth rates, buying shares at or below today’s $171.30 share price would purchase the demographic boost to earnings for free.
Like most developed nations, America will experience dramatic and inescapable growing healthcare demand. Between 2011, and 2020, the total United States population will grow by 28 million and the elderly population will grow from 41 million to 55 million. The United States is typical of the developed economies, which purchase products from Atrion. Larger aging populations will require more healthcare services, and these services utilize the array of Atrion’s products. Furthermore, it is difficult to challenge this outlook because demographic projections are arguably the most reliable forecasts in economics.
Atrion’s diversified product mix and customer base make revenues robust to sudden shocks or pockets of weakness in the medical supply industry. The firm’s cardiovascular products, fluid delivery systems and contact lens cases are not related. Moreover, with 60% of revenues from US customers, 16% percent of revenues from Canadian customers, and 24% of revenues from customers in other countries, the firm has further diversified its business model across markets. Indeed, Atrion’s revenue has proven reliable and has grown each year for the past five years.
The firm has demonstrated enviable cost controls that have yielded earnings. While revenues have grown by a rate of 8.5% per year, general operating expenses have increased only 4.2% and costs of goods sold has increased only 6.0% per year. Atrion’s business is scalable, and margins have increased with revenues.
Firm margins are protected from competitive pressures by its focus on patented products and products subject to the FDA’s Quality System Regulation. Currently, Atrion holds 392 patents, which expire as late as 16 years from now. Rival firms could take years to invent new technology and to gain FDA approval before selling competing products. These barriers to entry serve to dissuade and thwart firms from undercutting Atrion’s prices.
Atrion would not be harmed by increased government involvement in healthcare. Today’s healthcare reform package will extend coverage to an additional 32 million Americans, but will also add a 2.3% excise tax to medical device products. What impact would these changes have on Atrion if it was not able to pass any of the excise tax on to customers? This scenario was modeled by adjusting 2010’s income statement with a 10% increase in sales & variable costs, as well as a 2.3% drop in all sales revenue. These changes would modestly raise earnings by $4,000 –a 1.9% increase.
Atrion has a strong balance sheet that is free of debt and flush with $10.6 million cash. The firm is cash flow positive (with the exception of two large special dividends issued to return cash to shareholders). The capital structure of the firm is very stable.
Management and Stewardship: Chairman, and CEO Mr. Emile A. Battat was been with the company for 24 years and is 73. Similarly, three of the four other remaining directors have been with the firm for decades. Based on these deep associations, it is unlikely that the board would ever release the firm as an acquisition. Instead, owners of ATRI shares should expect that this company will provide returns the usual way: through growth and dividends. Recently, the board has demonstrated dedication to shareholder wealth by returning excess cash to shareholders through two special dividends totaling $9 per share in 2010. Management control is secure and, thankfully, aligned with shareholder interests.
Insiders own 20.8% of shares outstanding.
Valuation: Financial metrics show that ATRI is not trading at a meaningful discount to its peers, which face the same surge in demand:
|ROIC (5 Yr. Avg.)||16.6%||17.6%||7.3%|
Atrion’s financial statements are transparent and its historical earnings, regular dividends, and earnings growth rate are very steady. The consistency of these values over time and predictable aging in US and advanced economies makes a dividend discount model appropriate. This model adds discounted dividends issued over a 10-year holding period to the discounted sales price of a share at a P/E multiple of 16 in 2021. A reasonable scenario is presented below using Atrion’s historical growth plus one-half of the annualized growth based on demographic projections over the next ten years:
Model for Atrion: 2011-2021
|P/E Ratio in 2021||16|
|PV of 2021 Valuation||$258mm|
|PV Holding Period Dividends||$158mm|
|Total Present Value||$413mm|
|PV 2011 Share Price||$127.56|
|PV Dividends Per Share||$75.99|
|Present Value Per Shares||$203.55|
|Price at 30% Discount to IV||$142.48|
To achieve a 30% upside, we recommend buying shares at, or below $142.48.
Sources: Atrion website, sec.gov, company filings, Yahoo! Finance, US Census Bureau, Data provided by EDGAR Online’s I-Metrix Professional, XBRL-enabled application
Joe Escalada contributed to this article.