Merit Medical Systems: Matters of the Heart

For many aging boomers combating heart disease, it is in Merit Medical Systems (Nasdaq: MMSI), a maker of disposable medical products used in radiology and cardiology, that they will find an indispensable ally.

The company is a market leader in many of the products it offers, which include disposable catheters, syringes, inflation devices, disposable blood transducers, angioplasty needles and guidewires, pressure infusion bags, kits and procedure trays, among many other products. The company peddles 72% of its products to U.S. hospitals, custom packagers and distributors, and original equipment manufactures, with the remainder sold in international markets.

The company received notification from the U.S. Food and Drug Administration in December 2007 of 510(k) clearance for its new Sea Dragon torque device, which is used specifically with hydrophilic guide wires. The Sea Dragon follows November's release of the All-Star hemostasis valve, which is designed to maintain a fluid-tight seal around interventional devices, and the Prelude marker tip introducer sheath, which allows visualization of the sheath tip for precise placement during interventional and diagnostic procedures.

According to Fred Lampropoulus, chairman, president and CEO of Merit, all three products are high margin and enhance the company’s revenue growth and profitability in 2008.

Merit’s sale have been growing at a compound average annual rate of 11.8% over the past 10 years to an estimated $207.4 million in 2007. EPS, meanwhile, has been repeating and growing as well — at a 16.2% compound annual rate to an estimated $0.54. The stock closed at 16.07 on Friday. Shares have ranged between $10.89 and $16.84 over the last 52 weeks.

Comptition in the space is formidable, to be sure. Merit butts head with the likes of Boston Scientific Corporation (NYSE: BSX), Johnson & Johnson (NYSE: JNJ) and Medtronic, Inc. (NYSE: MDT), but that's OK. The company has been holding its own against these behemoths for the past 20 years and believes it will continue to hold its own because of “quality of materials and workmanship, innovative design, ease of operation and a prompt attention to customer inquiries.”

And revenue growth and profitability are expected to continue unabated in 2008. The consensus estimate from Thomson Financial is for revenue to grow another 8.7% to $225.1 million and for EPS to surge ahead 22.2% to $0.66. The estimate is particularly impressive given that nearly everyone is expecting at most 2% growth in GDP.

The health-care equipment and supply sector has always been historically resilient. The sector remained relatively strong throughout the bear market and weak economy that spanned 2000 to 2003 and this time around should be no different. Demographic trends almost guarantee increased demand for improved technology and better health-care equipment.

The majority of analysts believe it's business as usual for Merit, regardless of impending macroeconomic uncertainty. In December, analysts at Friedman Billings initiated coverage with an "outperform" rating and a price target of $18 a share. Zacks Investment research rates Merit an “aggressive growth” stock, stating: “Merit Medical Systems has certainly been a port in the recent storm. MMSI is a company that will do well in most economic environments. The stock is attractively valued at a PEG ratio of 1.3, below the industry average of 1.5.” Matrix Research provides the minority opinion, having recently downgraded Merit to "strong sell."

Our analysis persuades us to side with the majority. Merit's revenue and earnings growth has easily outpaced the industry average and the S&P 500 over the past three years. What's more, the balance sheet hasn't been sacrificed at the alter of growth: long-term debt is nonexistent and the company holds enough current assets to produce a very liquid and crisis-buttressing 3.4 current ratio.

More important, Merit's stock is reasonably priced, sporting a below-industry forward P/E of 24 and P/S ratio of two. They suggest Merit just might be a bargain, considering it’s one of two market leaders in the United States for control syringes, tubing, and manifold kits, and a world market leader for inflation devices and hemostasis accessories.

Working with matters of the heart, it is only apropos that Merit (MMSI) will be releasing its financial results for the fourth quarter and year ended Dec. 31, 2007, after the closing on Feb. 14 — Valentine’s Day.

Disclosure: none