Although this year is looking a little better than last for med-tech stocks, it's still largely a revenue growth-driven phenomenon. To that end, AngioDynamics' (ANGO) unimpressive growth has pushed it towards being an afterthought for many investors. While this story is going to take time to develop, patient investors might like what they see here in terms of value for money.
No Fast Turnaround In Q3
AngioDynamics has a fairly stable business, which is fine when times are good but not so helpful when procedure volumes are weak. Reported revenue dropped nearly 6% this past quarter, as a nearly 10% decline in U.S. sales offset good growth in its small overseas business.
Peripheral vascular sales were down just 1%, as peripheral vascular sales rose 5% on ongoing growth in EVLT Venacure as a varicose vein treatment option. Oncology and surgery sales continue to suffer from tough comps created by the LC Beads business, as NanoKnife revenues are still quite modest.
Lower sales were no help to the company's margin leverage. Gross margin slid a full point, while adjusted operating income (adjusted for acquisition costs) fell 31%.
Signs Of Life, But It Will Take Time To Deliver
In many respects, AngioDynamics is getting closer to business as usual. AngioDynamics has long been a company built by acquiring small businesses with solid products but uncompetitive economic structures. The company got away from that for a time, but it looks like they're back to old habits.
The company paid almost $400 million for Navalyst in January of this year; paying a fairly rich premium in the process at 2x sales and almost 10x EBTIDA. Navalyst used to be a part of Boston Scientific (BSX), and it should contemplate AngioDynamics nicely with its operations in vascular access and cardiology.
Not only has Navalyst arguably suffered from under-investment in sales, but the company's fluid management is something of a new business for AngioDynamics. Perhaps even more significant is the long-term potential of BioFlo - a thrombo-resistant that AngioDynamics could apply to a wide range of products and further differentiate them from rival products at Covidien (COV) and Bard (BCR).
AngioDynamics also has formed an OUS distribution agreement with Microsulis Medical to distribute this company's Accu2i pMTA microwave ablation system outside the U.S. This isn't likely to be a huge product for AngioDynamics, but it should fit in well beside NanoKnife.
NanoKnife - Hurry Up And Wait
There has been some encouraging clinical data over the last year pertaining to NanoKnife, but investors have to be patient with this opportunity. Initial results in hard-to-treat cancers like hepatocellular carcinoma (HCC) and pancreatic cancer have been encouraging, but it's going to take a lot more data (including data on overall survival and progression free survival advantages) to get the labeling the company needs.
Longer term, I can't help but find this platform interesting. Average procedure costs for the NanoKnife are only about $5,000 (2.5 needles per procedure), and that stacks up well against oncology drug regimens that can run upwards of $100,000 a year. Expecting NanoKnife to become the therapy of choice in soft tissue cancers is a recipe for disappointment, but it can be a valuable incremental therapy with significant potential for a company of AngioDynamics' size.
The Bottom Line
AngioDynamics has taken its licks of late, including some product recalls that were more distracting and embarrassing than financially damaging. What's more, there's no particular reason to expect an immediate improvement in overall procedure counts, so investors will likely continue to see good peripheral vascular results overshadowed for the next year or so.
I realize that the lack of growth today and the relative low future growth outlook (probably on the order of mid-single digits for revenue, barring a big positive surprise with NanoKnife) makes this a dull stock that is all but off-limits for growth investors. But I also see value here and I see a lot of potential in the NanoKnife. With a clean balance sheet and respectable free flow conversion prospects, I could see AngioDynamics going private if valuations stay low.
I'm looking for only mid-single digit free cash flow growth over the next decade and discounting that at an above-market rate of 11.5%. Even with those inputs, the stock looks too cheap, as the resulting fair value comes in at close to $17. While the prospect of four years of stagnant revenue performance (2010 to 2013e) is a concern, patient investors may find this an interesting risk-value proposition.