ICU Medical (ICUI) is a company likely to toil in near-obscurity for the foreseeable future. The company does most of what it does exceptionally well, but it strikes many as a dull business. While that doesn't seem to be a problem at companies like Bard (BCR) or Becton Dickinson (BDX), ICU Medical is relatively illiquid, under-followed, and still fairly volatile when it comes to earnings performance. All of that said, this is still a company that belongs on the watchlists of value-oriented med-tech investors.
Disappointing Top-Line Growth Highlights A Key Challenge
The theme coming out of the second quarter would seem to be that ICU Medical is doing quite well with its own businesses, but still struggling to make hay with an acquired business.
Overall revenue declined 1%, and whatever investors want to say about the sluggish patient volume conditions, that's not getting it done. Looking closer, though, the core infusion business was up almost 7% - a number that suggests better growth than the infusion market giants Baxter (BAX), CareFusion (CFN), and Becton. That's also impressive given the ongoing FDA issues (and presumed disruptions) at Hospira (HSP) - still a major distributor for ICU Medical products.
Oncology was also up nicely (over 10%), as the company continues to leverage innovative new products. The problem continues to be critical care - where revenue fell almost 10%.
Margins were once again mixed. Gross margin improved notably (more than four points both sequentially and year-on-year), but higher SG&A and R&D spending pushed operating income down 4%.
Can Critical Care Earn Its Keep?
I've mentioned before that when ICU Medical bought the critical care business from Hospira, it was buying a business that had suffered for some time from under-investment in R&D and product development and general mismanagement. Several years on, it seems like ICU Medical still hasn't worked out the problems.
While it's not possible to compare apples to apples yet, ICU Medical's performance in critical care has been lagging both industry leader Edwards Lifesciences (EW) and smaller peer Merit Medical (MMSI) when it comes to revenue growth. I do believe this business is still fixable, it is clearly dragging on results in the meantime. What's more, it seems safe to assume that AngioDynamics (ANGO) is going to be keenly focused in making its Navilyst deal work, and that includes a critical care component.
What To Do With All That Cash?
Another of the challenges facing ICU Medical is what to do with a substantial cash hoard. The company simply doesn't have the capacity to ram that all through into accelerated R&D (to say nothing of what it would do to reported earnings).
I'm also not sure that acquisitions are a slam-dunk - the deal for Hospira's critical care certainly hasn't been a great one so far, and AngioDynamics has been amply second-guessed for its acquisition of Navilyst. Still, I can't help but think that there are some worthwhile companies out there with a good product or two that could make sense as a target for that cash - witness Becton's recent deal for Safety Syringes (a developer of anti-needlestick pre-filled syringes).
The Bottom Line
Many of ICU Medical's recent internal projects have paid dividends - the new manufacturing facility in Europe, the development of oncology products, and so on. Unfortunately, while the company's margins and free cash flow production are looking good (and management raised the bottom end of its full-year EPS guidance), revenue growth is not (management lowered the top end of its guidance range). For better or worse, revenue growth drives stocks and ICU Medical's stock could be stuck until growth returns.
For the more patient value investors, this stock is worth watching. On the basis of mid-single-digit free cash flow growth, ICU Medical shares appear to be worth upwards of $60 a share. That's not enough to entice me to buy today, but given the past volatility of this stock that situation could change in relatively short order.