ICU Medical (ICUI) is an uncommonly squirrely stock. Although infusion therapy and critical care products are not exactly missionary sales, ICU Medical's stock as been uncommonly volatile due in large part to unpredictable sales trends. What that means for investors is that they have to fight their instincts and get bold during the tough quarters and get a little cautious when the stock is doing especially well.
Reasonable Performance For Q1
ICU Medical's performance in the first quarter was solid, albeit not spectacular. Overall revenue rose nearly 6% and slightly beat the average sell-side guess. Infusion therapy sales were pretty solid (up nearly 10%), and oncology continues to grow nicely (up 30%), but critical care is still the problem child (down over 14%).
Margins were likewise a bit muddled. Gross margin was down about two points from last year and softer than I expected, but operating performance was a little better. While reported operating income fell 7%, adjusting out a legal gain last year moves that a 17% improvement. Although ICU Medical continues to spend much less on R&D than most med-tech companies, 30% growth from last year is an encouraging sign.
Likely A Share Gainer
On the basis of hospital admissions data, it looks as though ICU may be gaining share on Baxter (BAX), CareFusion (CFN), and Becton Dickinson (BDX) in the infusion therapy business. That said, the vagaries of stocking orders and inventory management make it hard to tie ICU Medical's reported performance to metrics like that, or underlying surgery growth at companies like Johnson & Johnson (JNJ) or Covidien (COV).
Where I am confident that ICU Medical is gaining share (or in many cases, creating a market) is in the oncology business. Becton Dickinson, CareFusion, and Baxter are all also interested in this market, but ICU Medical seems to have the better mousetraps. Moreover, with new products like Diana hitting the market, there's a chance to build a real franchise here.
Nothing Happens Fast Here
Investors accustomed to more dynamic small-cap growth may be a little disappointed with how ICU Medical actually operates. Similar to peers like Merit Medical (MMSI) and AngioDynamics (ANGO) this is a story where solid execution is complemented by incremental new product opportunities.
Importantly, ICU Medical doesn't swing for the fences with flashy deals or by developing products for billion-dollar markets. ICU Medical's philosophy is that small companies that take huge swings at the ball in the hopes of hitting home runs usually miss and manage to go down in a heap. In other words, don't expect another Intuitive Surgical (ISRG) or even a MAKO Surgical (MAKO).
That said, the company needs to start posting better results in the critical care business. This was a controversial deal at the time (mid-2009) and the results since then haven't exactly been stellar. To management's credit, they said that it would take years to fix a business that Hospira (HSP) had under-invested in for years. That said, this isn't the sort of result I had in mind when I suggested that ICU Medical could threaten Edwards Lifesciences (EW) in the critical care space. I still believe that ICU Medical can do better here, but Edwards is fighting back hard (the CEO of ICU Medical likes to say that "the bigger they are, the harder they hit") and AngioDynamics' acquisition of Navilyst doesn't help.
The Bottom Line
ICU Medical was one of my favorite stocks when I was a sell-side analyst and I still think this is a really good management team. Granted, I wish they'd put more of their cash to work a little more aggressively, but it's hard to argue with a business model that has produced over a decade of positive free cash flow and a debt-free balance sheet.
I also think the shares are undervalued, even if future free cash flow growth is only on the order of mid-single digits. For better or worse, though, cash is about one-quarter of the value of the stock here.
What does concern me is that things have been going really well for ICU Medical stock, due at least in part to successful new product introductions and a clearer commitment to new product development. Historically, a prolonged stretch of good performance ought to have investors a little nervous. So while I still see quality and value in ICU Medical shares, this pseudo-technical factor has me a little nervous about the shares right now.