Why Exactech Is The Company To Look At

| About: Exactech, Inc. (EXAC)

Summary

The orthopedic industry is expected to grow significantly in the next 8 years.

Exactech, Inc. has been experiencing double digit sales growth on major segments for a few years.

Exactech, Inc. is launching new products expected to reach the market in 2017, and is using its cash to support the launches.

Quick Snapshot:

  • Market Price: $27.20
  • Industry: Orthopedic Devices
  • Market Cap: $385.12 M
  • 52-week range: $16.59 - $28.66
  • Beta: 0.68

Company Description:

Exactech, Inc. (NASDAQ:EXAC) develops, manufactures, markets, distributes, and sells orthopedic devices used in the reconstruction or replacement of joints, deteriorated by injuries or diseases such as arthritis. Leading products include devices used for knees, hips, shoulders, spines, and various extremities. Additionally, Exactech provides biologic allograft services to physicians and hospitals in the United States and the rest of the world. Exactech was founded in 1985 by orthopedic surgeon Bill Petty, MD, his wife Betty Petty, and biomedical engineer Gary Miller, PhD.

Source: Bloomberg

Industry Outlook:

The orthopedic industry is expected to grow significantly over the next years and reach $43.1B by 2024 from the 2015 market value of $29.7B, according to Grand View Research. The biggest drivers of the industry being injuries and diseases, the expected growth and increasing demand for orthopedic surgeries come from the increase in road accidents and sports injuries, and the growing prevalence of orthopedic conditions, such as osteoarthritis and osteoporosis. The products now available in this industry are made of new materials that lead to a higher success rate of surgeries, meaning higher demand. Additionally, the aging population in most of the world, especially in the US, requires more hip replacement surgeries, due to more frequent hip fractures.

Source: US Census Bureau, Population Statistics and National Center for Health Statistics

As for geography, in 2012, the United States dominated the world market, followed by Europe. Looking at 2015, the trend remains with 51.4% of the market in the United States. Additionally, there are plenty of opportunities for Asia Pacific to rapidly expand its market due to its surge in population, rapid industrialization, and rising obesity and bone disorders. China and India are predicted to account for the biggest geriatric population pool worldwide by 2024, therefore aiding in an expected market CAGR of 8.6%.

People:

Exactech has been experiencing stable leadership for over 30 years. The company was founded by William Petty, MD, Executive Chairman and Chairman of the Board, by Gary Miller, PhD, Executive Vice President of Research and Development, and by Betty Petty, Vice President of Administration and Corporate Secretary. Dr. Petty is a former orthopedic surgeon and University Professor, and was given an award for Outstanding Research for his book, Total Joint Replacement. Dr. Miller is a former University Professor and used to be a consultant to the FDA and to companies such as Johnson & Johnson.

The company' CEO is David Petty, the son of founders Dr. and Ms. Petty. Mr. Petty has been working at Exactech since 1988 and has held various positions in operations, and sales and marketing, before becoming President of the company in 2007 and CEO in 2014. The company's CFO is Joel Phillips, CPA. Mr. Phillips previously held positions in accounting and Management Information Systems. He has been Exactech's CFO for 18 years. This leadership has allowed for the company to grow for 31 years.

Exactech has kept a culture of a family business, while trying to improve the quality of life of its customers. Its strategy is to "create a customer-centric culture that creates customer loyalty", and this strategy has been working so far, since the company has been growing overtime.

Source: Exactech

Product Segmentation:

Exactech segments its products in 4 major categories: Hip, Knee, Extremities, and Biologics & Spine. The first three segments have been experiencing double digit growth over the last couple years. Hip has been growing at a rate of 17% and accounts for 17.6% of revenues in 2015. Knee has been growing at a rate of 11% and accounts for 29.3% of revenues. Extremities accounts for 34.9% or revenues, Biologics and Spine for 9.4%, and other products for 8.8%.

Source: Form 10-K

The hip segment includes products for hip replacements such as the Alteon Monobloc revision hip stem, which was pilot launched this year. The extremities segment includes the Equinoxe shoulder system for injuries or diseases of the glenohumeral joint, and a highly competitive range of glenoid solutions. This segment includes solutions for shoulder and ankle joints. The Biologics and Spine segment includes products for bone graft and cervical plates. Other products include the dental biologic business.

Track Record of Growth and Future Opportunities:

Exactech has had a track record of growth since its creation in 1985. In 2016, it launched three major revision system, for the hip, the knee, and the shoulder joint segments.

Source: Exactech Company Fact Sheet

These 3 revision stems were launched through a pilot launch to assess how the market received the new products. In Q4 2016 and 2017, Exactech is planning to go through the limited launch worldwide. They will keep the amount of inventory small until demand for the products can be better assessed.

In Q3 2016, Exactech had its first successful surgery performed with the new Vantage total ankle system, after getting clearance from the FDA earlier this year. The product will be fully launched in the first 6 months of 2017. The company also had its first successful surgery with the next Exactech GPS total shoulder application, which is a computer- assisted surgery system for total joint replacement. The pilot launches of the new products are underway should bring the company revenues next year. These two successful surgeries will help the commercial adoption of Exactech GPS in the first half of 2017.

For the Hip segment, in 2016, Exactech launched its humeral reconstruction prosthesis used for complex and challenging cases of humeral bone loss. Additionally, the company is waiting for FDA approval for its next generation Alteon coated hip stem. FDA approval is expected to be received shortly and the product will be launched in the first half of 2017. As for the Alteon Monobloc revision hip stem, first surgeries are expected to take place in Q4 2017 or Q1 2018, after being fully launched in the first half of 2017, which will bring progressive contribution to sales growth.

For the Knee segment, the revision knee system had its limited launch in October 2016 and is expected to bring meaningful contribution in 2017. The company also made significant investments with launches planned for the second half of 2017.

Looking at the Extremities segment, the Equinoxe product line just welcomed a new short humeral stem which will be pilot launched in Q1 2017, pending FDA approval.

As for the Spine segment, the Pro line of products will be extended in Q1 2017 additionally, the second version of the Acapella anchored cervical interbody, which is a cervical spacer system, will be launched in Q2 2017, as well as the plasma coated Octane lumbar interbody, which will go through a limited launch next year.

Exactech is expanding its various product lines and will be launching many new products next year, with the goal of expanding its operating margin in 2017.

Financials:

To support all of its launches, Exactech has been using its cash and keeping its debt level low. In 2015, the company had $12.7M in cash and cash equivalents, compared to $10.1M in 2014. Additionally, it had only $16M in debt in 2015, a decrease from $20.3M the previous year. Therefore, the company has a D/E of 7.0%, which is the lowest among its competitors such as ConforMIS, Inc. (NASDAQ:CFMS) and NuVasive, Inc. (NASDAQ:NUVA), with 12% and 53.6%, respectively.

Additionally, Exactech has a forward P/E of 20.57 compared to its major competitors' median of 25.08. It shows that the company is undervalued and has room for growth.

Exactech had $241.8M in revenues in 2015 and is expected to have its revenues reach $257.5M this year. In 2015, the company had a gross margin of 69.55%, an operating margin of 9.22%, and a net margin of 6.11%. On average over this year, Exactech spends 61% of its sales on its operating expenses, including 8% on its SG&A expenses, 35% on its sales and marketing expenses, and 8% on its R&D expenses. Looking at its competitors, Exactech has higher operating and profit margins than the industry's average of 8% and 5%, respectively.

Looking at revenues by geographic location, 69.5% of the company's revenues come from the Unites States and 30.5% come from international countries, which is where a lot of potential for growth can be found, especially in Asia.

Risks:

Investing in Exactech can also be a risky investment. The company is not the leader of its industry and has a lot of big companies to compete with. Their market share has the potential to increase but also decrease. The company also has exposure to changes in currency risk. Because they do over 30% of their business outside the United States, variations in currencies can lead to a loss in revenues. Last quarter, Exactech experienced a $73,000 currency gain because of the strength in the Japanese yen and effective hedging strategies, but this gain can also quickly become a loss. This would impact the company's financial statements and lead to apparent slow revenue growth, which would impact the stock price.

Conclusion:

Exactech is a BUY. The company is in industry that has a lot of potential for growth. The company in itself has been experiencing high growth, and is in the process of launching many new products, that will reach the revenue stream within next year. The stock is undervalued and has seen a higher total return than the Russell 2000 and other healthcare companies in the past year, which will last for another few years.

Source: Bloomberg

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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