With the recent rally in medical stocks, people have begun to notice their value. Yet many of the smaller companies have been overlooked. One of these is Atrion. Atrion (ATRI) is a small cap ($450M) medical supplies company that has leading exposure to many niche markets with a net income of $26M in 2011.
Atrion develops and manufactures medical devices for fluid delivery, ophthalmic (eyes), and cardiovascular applications. The fluid delivery products accounted for 38% of 2011 revenue and include medical valves for syringes and tubing clamps. The cardiovascular devices were responsible for 29% of 2011 revenues. The top product is the MPS2 (Myocardial Protection System), which delivers necessary fluids and medications to the heart during surgery. The MPS2 includes a line of disposable products, and is the only device that allows mixing of nutrients without diluting the blood. The ophthalmic products accounted for 17% of 2011 revenue. They are a leading manufacturer of contact lens cases and also manufacture balloon catheters for eye surgery and treatments. Atrion has the only balloon catheters with FDA approval for treating nasolacrimal duct obstruction. Finally, Atrion manufactures other medical and non-medical products that accounted for 16% of revenue in 2011. These devices include disposables to test blood clotting, needle and scalpel containment products, inflation systems and valves for marine and aviation applications, and pressure relief valves for a variety of applications of which it is the leading manufacturer.
Atrion markets its components to other equipment manufacturers to be incorporated into their products. They also sell finished goods to hospitals and other healthcare facilities. The products are sold through direct sales personnel, independent sales representatives, and distributors, which is common practice in the medical device field. They have slowly increased ex-US sales to 42% of total sales. This allows for the safety of the large US market, but with the growth potential of world exposure. The company has a diversified portfolio of products and maintains leadership in all segments, which will help it weather any storm.
Atrion depends on petroleum-made resins for most of its production; the company has few suppliers that can provide these resins. A supply disruption would delay manufacturing of product until another source is found. Atrion is trying to secure other sources as a backup.
There has been a slowdown in growth and earnings and revenue have decreased over the last quarter. This negative publicity may lower the stock much further if future earnings are not met, since it has risen based on growth.
From the most recent quarter, things may not be as bad as they may seem, even though earnings are down. Cardiovascular increased 16% and fluid delivery increased 7% while ophthalmic products decreased due to the anticipated decline in shipments to a large customer inventory adjustment. The adjustment is an extraordinary event, but did impact the sales and related numbers significantly this quarter. There was also a reduction in non-medical valves sales, which will likely increase when the recreational boating market returns. Investments decreased after spending $2.9 million for new capital and $2.7 million for share repurchasing, both of which will add value over time. Currently, Atrion has 360 active patents and patent pending applications that expire at various times over the next 18 years. This is a good number of patents, considering the size of the company and its revenue.
Atrion has had a steadily increasing dividend for over 9 years, with an annual return of 17.5%. Of course, the dividend is still at a mere 1%. The dividend itself is no reason for owning the stock.
The valuations are also fair for the amount of growth it's had ,as many of the valuations are close to the industry average. The price-to-earnings ratio is at 19, price-to-sales is 4, and price-to-cash flow is 16. The enterprise value/EBITDA is 9.5. All of these ratios are in normal ranges to provide evidence that the growth can continue.
If you look back, Atrion has had a good run, but is there more left? Atrion has been accumulating plenty of cash with a quick ratio of 4.80 and no short-term or long-term debt. In fact, 86% of the liabilities and stockholder's equity side of the balance sheet is stockholder's equity.
Atrion last quarter results were not the best, showing a negative growth in both revenue and earnings. It comes as little surprise that trailing twelve months ROA and ROE are down about 2-3% as well. The margins have dropped, but it is due to a large share repurchase, and margins are still very high at 30% for its operating margin and 20% for its profit margin. The margins and fundamentals need to be watched. If they slip further next quarter, then it is time to sell. Management has told the public that the fundamentals should improve and continue the growth that was typical with Atrion.
The slowdown in growth worries me for the near future, though. I think Atrion is headed downwards for a little while in the future. The small stumble in earnings will most likely cause some investors to dump their shares in this usually consistent growing stock. Overall, the company is well positioned, with a solid plan for the future. The past performance of the company's fundamentals shows that the company knows what it takes to succeed. It is only a matter of whether Atrion can sustain its position, and I think it can. Many of its metrics are near industry averages or above, which is strides further than it was 10 years ago. I am waiting for a 7% drop (somewhere around $200 per share). Over the long term, Atrion will do well.