Can Exactech Keep the Momentum Going?

Normally I try not to waste too much of my time analyzing earnings previews as I prefer actual results, and rarely do I ever trade a based on such analysis. Today, I’m going to make an exception and at least analyze an earnings preview.

Over the last year, Exactech (EXAC), a small medical device manufacturer, has made huge strides not only in increases in the share price, but also as a company. The share price jumped from the mid-teens last September to the mid-twenties as the company made equally impressive gains in revenue and profits.

The market has applauded the company’s success with a lofty valuation. Exactech currently sports a price of 35 times trailing earnings and 21 times forward earnings, suggesting that the market expects large earnings gains through 2008. A big question for Exactech’s shareholders is whether the Florida-based firm will be able to maintain or increase its already high multiples going forward.

On April 10, Exactech raised first quarter earnings guidance to 22 – 24 cents from 18 – 20 cents per share on revenues of $40 million, up from $36 – 38 million. The share price responded in after-hours trading and rose to over $29, but has since settled down in the $25 dollar range.

In the upcoming earnings report there will be several things I will be looking for:

1. How international operations are shaping up: Exactech expects that 22 percent of revenue will come from international sales in 2008. As the dollar continues its slide and global markets expand, foreign sales may become the key driver in Exactech’s future success. The company is making strides in this area as it is beefing up management for international sales and opening up new distributers, but it will be interesting to hear management’s take on how the situation is unfolding.
2. What is the deal with all the acquisitions? Exactech recently acquired Altiva Corporation, a small spinal implant manufacturer for $25 million, as well as a small French distributor, France Medica SAS, for $11.1 million. I am excited to hear whether management is successfully incorporating these companies’ assets.
   Also, and more importantly, Exactech filed a $100 million security shelf with the SEC where the company will offer common and preferred stock. Considering that Exactech’s balance sheet improved last quarter as well as over the last three years, it is likely that the company is gearing up for a big acquisition. Hopefully CEO David Petty will shed some light on the topic.
3. Inventory: Whenever I’m looking at a manufacturing company, I always keep my eyes on inventory to make sure that things aren’t spiraling out of control.
4. Free Cash Flow: Over the past year, Exactech made huge percentage gains in free cash flow (operating cash flow minus capital expenditures). Also, for 2007, net income was just 63 percent of free cash flow (the lower the better). For this upcoming quarter, similar performance would be very encouraging.
   

Overall, Exactech has performed very well; we will see in the upcoming report whether or not they can keep the momentum going.

Disclosure: Author is long Exactech

Comments

[NEH]

I love this little company and have been long about two years. It's family owned, with a second generation on board, and this year it has ventured into international waters. Excellent!

[Mr. Wynn]

I have had EXAC on a watchlist since Apr 25 of '07. In that time the stock is up more than 57%. Did I pull the trigger? Of course not, that would have been too farsighted of me. It drives me nuts sometimes to look at my watchlists and to see how much some companies have moved since I started watching them. I am tempted to buy Exactech now but I'm a little afraid that the multiples are getting stretced too much. They report tomorrow (the 29th) and I just can't see my way clear to do it. I may continue my regret if they come in with great earnings. I have to stay away from the coulda woulda syndrome. Great company, though.

[NEH]

Mr. Wynn, don't even mention 'watch lists' - I have far too many myself. Exactech will not be paying dividends but concentrating on acquisitions, and reserves the right to issue additional shares for that purpose according to their annual report. Considering this, I expect anyone interested in buying in now should consider it for the long haul. I plan to go the distance with this great under-the-radar company, which is a typical strategy for me, ie, investing in smaller, less pricy and financially strong companies in sectors/industries that are profitable and strong going forward. Exactech fits that description beautifully. And the heavy investment/ownership by family gives me great confidence that they will continue to pursue good management principles. I think there is still a lot of upside here at $24/share or thereabouts.


On Apr 28 11:20 AM Mr. Wynn wrote:

> I have had EXAC on a watchlist since Apr 25 of '07. In that time
> the stock is up more than 57%. Did I pull the trigger? Of course
> not, that would have been too farsighted of me. It drives me nuts
> sometimes to look at my watchlists and to see how much some companies
> have moved since I started watching them. I am tempted to buy Exactech
> now but I'm a little afraid that the multiples are getting stretced
> too much. They report tomorrow (the 29th) and I just can't see my
> way clear to do it. I may continue my regret if they come in with
> great earnings. I have to stay away from the coulda woulda syndrome.
> Great company, though.

[borisb]

In Exactech's favor the portfolio has expanded from 3 product lines to 5 product lines. The sales force is better off with this more complete surgical suite. With all this accomplished Exactech is now expanding sales force and distribution internationally where a lower dollar may be a plus. They seem to be pacing themselves well and the best may be yet to come. The stocks large runup since early November may have more profit taking pressure manifest.

[ryortho]

One more factor: Exactech's float is the smallest in percentage terms than any other orthopedic company. Small float, rising expectations, it does add up to continued high valuations and strong price. Disclosure: I don't own any EXAC.