Prior to the Great Recession, healthcare enjoyed a somewhat inflated reputation for its steady-eddy revenue and earnings. Since then, investors have learned that patient visit counts and hospital capital budgets can create quite a bit of volatility – look no further than the muted performance at major device companies like Medtronic (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), or Bard (NYSE: BCR).
And then there's ICU Medical (Nasdaq: ICUI). Flying in the face of conventional rules about how medical device companies are supposed to act, this has often been a volatile performer in terms of its reported results and the long-term stock action reflects that. With financial performance looking a little haggard, but the company's competitive position still fairly strong, this may well be one of those periodic opportunities to pick up shares in an oft-overlooked small-cap med-tech player.
Sluggish Revenue Hits Hard
This was not a banner quarter for ICUI, as revenue showed a scant 1% increase from last year. The company's two core businesses were both weak, as weak custom tubing sets pushed IV therapy revenue down 4% and critical care sales fell 6%. Oncology continues to be a star, though, and revenue rose 74% (though it is only about 10% of total sales).
Although revenue growth was not strong and the cost of inputs like resins have done the company no favors, gross margin still ticked up about 160 basis points. Due in large part to a sizable jump in R&D spending, operating income fell 9% and operating margin dropped about two full points.
R&D – Too Little Too Late?
One of the big worries about ICU Medical for some time has been the level of the company's R&D spending. While many med-tech companies spend 10% or more of their sales on R&D, ICUI has always been a much more conservative spender. Management argues that the company engages in keenly-focused R&D projects designed to fill specific market opportunities as opposed to the fishing expeditions that other companies will launch in their labs.
The fear, then, is that the company will someday come up short. ICUI has done very well in using its CLAVE product line to carve out business against the likes of Baxter (NYSE: BAX), Carefusion (NYSE: CFN), Becton Dickinson (NYSE: BDX), and B.Braun, but eventually patents expire and competitors launch new products.
On the other hand, new products like the Neutron neutral-pressure needless connector show that the company is not just resting on its laurels. What's more, the company still has only modest competition in the oncology space – a market where clinicians and practice managers are just beginning to realize the dangers of employee exposure to chemotherapy drugs. Just as the advent of needle-free connectors led to a movement to adopt them in mass, so too could this happen in the field of oncology with ICUI's closed-loop systems.
Waiting For Initiatives To Pay Off
ICU Medical still has a lot to live up to with its acquisition of the Hospira (NYSE: HSP) critical care business. While Edwards Lifesciences (NYSE: EW) is a strong entrenched player, a dearth of past competition and management's desire to focus on transcatheter heart valves could represent a real opportunity. Along similar lines, this could be a fertile field for future R&D projects, and the company recently signed a three-year distribution agreement with Premier for hemodyanmic monitoring products).
Elsewhere, the company has other irons in the fire that should pay off. Expanding production and distribution in Europe should lead to shorter lead times and more market share, and the company likewise continues to diversify its domestic distribution relationships.
The Bottom Line
There is nothing wrong with ICU Medical that a healthier job market (meaning more workers on health insurance and/or more comfortable in taking off work to go to the doctor) shouldn't go a long way towards fixing. Yes, competition is a risk but that is true for almost any company selling a worthwhile product. More concerning might be management's priorities for the considerable cash this company has – under-investing in R&D could stifle future revenue, while share buybacks in an already illiquid stock seem like a questionable use of funds, as opposed to selective M&A.
All of that said, ICUI is back near trough valuation and this has historically been a good stock to buy at these levels. Assuming that the company can maintain just high single digit revenue growth over a multi-year period and show some incremental margin improvement, this should be a market-beating stock.