Seeking Alpha

Stereotaxis: Poised For A Strong 2020

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About: Stereotaxis, Inc. (STXS), Includes: ISRG, JNJ, SNN, SYK
by: Alpha Generator
Alpha Generator
Long/short equity, Deep Value, growth at reasonable price, special situations
Summary

Stereotaxis is a leader in cardiac robotic technologies.

The company is poised for a strong 2020 and I think it merits a closer look for healthcare investors.

Strong IP and regulatory clearances underpin the company's differentiated edge.

Stereotaxis, Inc. (NYSEMKT:STXS) is a ~$346 million market capitalization healthcare company headquartered in St. Louis, Missouri. Founded in 1990, the company makes robotic systems and instrument for treating abnormal heart rhythms in patients. The stock has had a massive run over the past couple of years, giving investors who went long the stock in April 2018 an 800% return already. I think there is greater upside potential for STXS and that investors should consider adding exposure to the company to their portfolio today. STXS equity shares should outperform in 2020, and strong IP and regulatory clearances underpin the company's differentiated edge.

Company Fundamentals

STXS's main project is the Niobe ES robotic magnetic navigation system that allows interventional cardiologists to guide catheters through the blood vessels and chambers of the heart to treatment sites. The company also makes the Vdrive system, which offers navigation and stability for the diagnostic and therapeutic devices used in such interventional cardiological procedures.

While the company also offers a variety of other products, the fundamentals of the company are worth a closer examination. STXS is a small company, with only several hundred employees. The stock currently trades at just over 11x annual sales of about $30 million. While gross margins are strong in the 80% range, the company has a negative operating margin and negative net income margin in the double-digit percentages, meaning the company is destroying value on a current basis for shareholders. I believe this is a temporary situation for the company and that it signals investment into longer-term projects that will yield large potential returns for shareholders.

While topline revenue has stagnated over the last quarters, gross margins remain strong and are consistently in the 80% range. Physicians who use STXS's robotic magnetic navigation (RMN) system are pleased with the results and outcomes for their patients. STXS's investment over the past years has resulted in a new system called Genesis which the company has introduced on top of the RMN system. Genesis has additional capabilities such as rotating magnet heads that allow physicians to complete their interventional procedures with even greater precision. Genesis incorporates over 1,000 components from over 100 suppliers and the system is cleared for commercialization in Europe, per management's discussion on the last earnings call.

In light of the company's progress over the last year, I do agree with fellow authors here on Seeking Alpha that the company represents an attractive potential acquisition target for much larger medical device players such as Smith & Nephew (NYSE:SNN) and Stryker (SYK). Also, I think that Intuitive Surgical (ISRG) is indeed an appropriate analog for STXS in a more mature state as the company is the leader in endovascular surgery equipment and devices. STXS is also making strides toward the development of its own proprietary catheter technology, which should pay off for shareholders in the coming years.

On December 16, 2019, STXS announced that HCA Midwest Health (the largest healthcare system in the Kansas City region) has launched a new robotic arrhythmia care program at Overland Park Regional Medical Center. STXS has installed their RMN system there and patients are currently being treated with this technology. This partnership is the first of several more to come, I believe, in the 2020 calendar year.

I do find it comforting that the company does not carry any debt on its balance sheet; this is a healthy data point. Moreover, insiders and large institutional shareholders own a large percentage of the outstanding shares. Hedge funds including Dafna Capital Management (which belongs to STXS Founder and CEO Dr. Nathan Fischel) and the Redmile Group are major investors across STXS's capital structure as well.

Being a microcap company, STXS is relatively underfollowed, and I think this represents a significant opportunity for shareholders willing to take a bit more risk in this field.

Risks

One thing that does worry me is the company's current cash position. The company had $31.6 million in cash and cash equivalents per their latest filing, which indicates that the company may need to raise additional equity or debt capital in coming years based upon their operating plans. This could dilute existing shareholders to some extent, but is mitigated by the company's lack of debt and potentially easier access to debt capital markets. Shareholders should watch for management signals around potential funding plans in the coming quarters. Management has also historically been responsible and conservative in terms of free cash flow monitoring, which is a positive signal and additional mitigant to this risk. CFO Kimberly Peery, on the last earnings call, also stated that STXS's "strong balance sheet allows for increased investment in growth initiatives and the ability to reach profitability without additional financings."

There exists the potential that larger players in the space such as Siemens Healthineers AG (OTCPK:SMMNY), which recently acquired Corindus Vascular Robotics (NYSEMKT:CVRS), or Johnson & Johnson (JNJ), which acquired privately held Auris Health earlier last year, could outcompete STXS in the commercial marketplace. I think this is unlikely given cardiologists' feedback on STXS devices and the fact that this is by no means a winner-take-all marketplace. STXS invests in research & development and should continue to remain competitive.

Conclusion

STXS could have a very interesting 2020 and it may be worth adding conservatively to long exposure in the company. Investors should carefully watch this company in the next quarters and pay particularly close attention to the company's next earnings report, on February 13 before the market opens. Good luck.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in STXS over 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.