TransEnterix: Very Overvalued Robots And Selling Assets

|
About: TransEnterix, Inc. (TRXC), Includes: ISRG
by: GG Pharma Research
Summary

TransEnterix designs, develops, acquires, and sells medical devices.

In the six months ended June 30, 2019, the company reported sales of $5.82 million, 0.52x the revenue reported in the same period in 2018.

With the amount of money invested in marketing, it is worrying that revenue is declining at such a fast pace.

At a EV/Sales ratio of 14x, the valuation is too high for a company reporting declining revenue and negative FCF.

The company will not likely file for bankruptcy in the future. Instead, TransEnterix will probably try to sell equity. As a result, the risk of dilution on this name is very significant.

With free cash flow of -$39.7 million in the first six months of 2019 and $23 million in cash, TransEnterix (TRXC) is selling assets to obtain some money. As a result, the share price is declining at a fast pace. The market appears to be quite worried about the stock dilution risk. Also, the company reported massive revenue declines in 2019, and it is trading at 14x forward sales, which is expensive. Competitors are trading at less than 14x sales and do report some revenue growth.

Source: 10-Q

Business And The Sale Of AutoLap System

Founded in 2006, TransEnterix designs, develops, acquires, and sells medical devices.

Source: Company’s Website

The company’s leading device is the Senhance System, which digitizes the interface between the surgeon and the patient in laparoscopy. With this technology, healthcare professionals can increase control and enhance precision. Read the lines below for more details on the robot changes surgery:

Source: Company’s Website

Surgeons can use Senhance System in the United States, the EU, Japan, Taiwan, and other countries. The company makes only 12% of its revenue from the United States. In the first part of 2019, 72% of the total amount of revenue was generated through the sale of systems, and 23% was made from the sale of instruments and accessories. The image below offers further information on the matter:

Source: 10-Q

On October 31, 2018, TransEnterix acquired MST Medical Surgical Technologies including MST’s AutoLap technology for more than $20 million. TransEnterix presented the acquisition with a lot of optimism. Read the lines below for more details on the matter:

“Through this acquisition, the Company acquired MST’s AutoLap™ technology, one of the only image-guided robotic scope positioning systems with FDA clearance and CE Mark. The Company believes MST’s image analytics technology will accelerate and drive meaningful Senhance System developments, and allow the Company to expand the Senhance System to add augmented, intelligent vision capability.” Source: 10-Q

With that, on July 3, 2019, TransEnterix decided to sell the AutoLap System for $17.0 million and an additional equity investment of $30.0 million in the company by the buyer. Let’s recap a bit; the company acquired these assets more than nine months ago and is trying to sell them now. The transaction shows that the company is looking either for cash or a great asset deal. The main issue is that the buyer has not paid the first $5 million that was due on July 31, 2019. Besides, the acquisition contract said that the buyer had to buy 15 million shares at $2. However, the share price right now is $0.75. Most investors will be wondering whether the buyer will purchase shares at 2.6x the current share price. See the stock price chart in the image below:

Source: Seeking Alpha

The lines below offer further information on the sale deal. In our view, investors interested in the company should read the lines below before touching the shares.

Source: 10-Q

Declining Revenue

In the six months ended June 30, 2019, the company reported sales of $5.82 million, 0.52x the revenue reported in the same period in 2018. The decline in revenue will most likely alarm most growth investors. In the first half of 2019, TransEnterix invested $11.9 million in research and development to design and develop new products. With that, the company’s marketing expenses are 1.29x the R&D expenses. Investors who think that the company is more focused on R&D should take a look at the income statement. With the amount of money invested in marketing, it is worrying that revenue is declining at such a fast pace. Besides, the company reported operating losses of $44 million in the first half of 2019, more than 2x than that in the same period of 2018. The image below offers further information on the matter:

Source: 10-Q

Value investors usually look at the FCF. On this name, they may not feel compelled. In the six months ended June 2019, the FCF was equal to -$39.7 million with CFO of -$39.5 million. In the same period in 2018, the company reported FCF of -$19.5 million.

Stock-based compensations were equal to $6.3 million in the first half of 2019, 1.5x the figure in the same period in 2018. Most investors will most likely not appreciate that TransEnterix is making more and more use of its shares to pay directors. The share price has declined from $6 to less than $1. With a declining share price, it is evident that the company would need to issue a greater number of shares to pay the same compensation to directors. With that, most investors will wonder whether it is smart to pay directors when shareholders are losing tons of money. Besides, using a more significant amount of stock-based compensations when the shares are priced at multi-year lows is a worrying signal. It is clearly more advantageous for the company to issue shares (for acquisitions, compensation, of liquidity) at higher prices. The chart below offers the most recent share price dynamics:

Source: Seeking Alpha

See below the top of the cash flow statement:

Source: 10-Q

Balance Sheet

With an asset/liability ratio of 2.8x and $23 million in cash, the company’s balance sheet looks clean. On the liability side, it is very favorable that the amount of debt is not significant. As of June 30, 2019, the company reports notes payable of $29 million, which is almost equal to the total amount of cash in hand. The images below offers further information on the matter:

Source: 10-Q

Source: 10-Q

The company acquired several businesses in the past. The acquisition contracts included contingent considerations, which the company may have to pay in the future. In total, the company may have to pay more than $18.8 million. The image below offers further information on the matter:

Source: 10-Q

See the image below for more on the company’s liabilities:

Acquisitions Paid Using The Company’s Stock

In 2018, TransEnterix acquired MST Medical Surgery Technologies Ltd. for $20 million. The company paid $5.8 million in cash, $8.3 million in stock, and $5.9 million in contingent considerations. The lines and table below offer further information on the matter:

Source: 10-Q

Source: 10-Q

In September 2018, the stock price of TransEnterix was more than $5. The company did well acquiring other companies with stock. The previous owners of MST medical Surgery Technologies would certainly be disappointed with TRXC's significant stock price decline over the past 8 months.

With that, the assets acquired from MST Medical Surgery Technologies Ltd. were represented by goodwill and research and development. The risk of the acquisition was very significant. If the research and development acquired do not provide any value to the company, this could represent another $20m loss to TransEnterix. The image below offers further information on the assets acquired:

Source: 10-Q

On September 21, 2015, the company executed another transaction to acquire Senhance. The payment was made with ~15.5 million shares, $25 million, and €27.5 million. The price per share was valued at $1.4 per share. The number of shares used in the Senhance’s transaction was below than that in the acquisition of MST Medical Surgery. The lines below offer further information on the acquisition of Senhance:

Source: 10-Q

With that, the company used stock to pay for acquisitions when the share price was at $1 to $2. It means that the management does not see the stock that undervalued at these marks.

Valuation

Right now, TransEnterix has 218 million shares outstanding. The share price is $0.75. Thus, the market capitalization equals $163 million. With debt of $29 million and $29 million in short-term investments, the enterprise value equals $163 million.

Recent TTM revenue was equal to $18 million. However, in the first six months of 2019, the company reported revenue of $5.8 million. With this in mind, we believe that forward revenue of $11 million is reasonable. The chart below offers further information on the company’s revenue:

Source: Ycharts

With this forward revenue figure, we get an EV/Sales ratio of 14x. The valuation is too high for a company reporting declining revenue and negative FCF. Also, note in the charts below that competitors are trading at less than 14x sales and do report some revenue growth.

Source: Ycharts

Source: Ycharts

Conclusion

With FCF of -$39.7 million in the first six months of 2019 and $29 million in cash and short-term investments, investors are dumping the stock. It makes a lot of sense. Most market participants are most likely afraid of the company burning all its cash. Also, taking into account the recent sale of intellectual property, the market is worried about the company’s future operations. Besides, TransEnterix is using a significant amount of shares to pay directors and make acquisitions, which most investors will dislike.

In our opinion, the company will not file for bankruptcy in the future. Instead, TransEnterix will probably try to sell equity, like it did in September 2019. As a result, the risk of dilution on this name is very significant. With regards to the valuation of the shares, we believe that TransEnterix is quite overvalued at 14x forward sales. Other competitors do report revenue growth and are not trading at that massive valuation.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.