Retractable Technologies Inc.: Order For COVID-19 Vaccine Syringes Is A Game-Changer
Summary
- Retractable Technologies Inc. reported Q1 earnings highlighted by strong sales growth and firming profitability.
- The company announced a major order for its specialty auto-disable syringes by the U.S. Department of Health and Human Services related to the COVID-19 pandemic.
- RVP is up by 490% since its low in March with strong momentum following the government contract announcement while also supported by overall solid fundamentals.
- We rate shares as a buy based on a still reasonable valuation and a positive long-term outlook in terms of organic growth opportunities.
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Retractable Technologies Inc. (NYSE:RVP), with a market cap of $205 million, designs and manufactures specialty medical syringes, needles, and related blood collection devices. The products feature a patented retractable safety mechanism designed to eliminate exposure to contaminants, bloodstream infections, and needlestick injuries. The company recently announced a major order by the U.S. Department of Health and Human Services. The expectation is that the government will utilize RVP syringes for a future COVID-19 vaccination program. Indeed, the stock is up an incredible 490% from its low in March, which is also supported by a trend of firming profitability over the past year. We think the stock has value at current levels with solid fundamentals and an overall positive outlook.
(Source: finviz.com)
Q1 Earnings Recap
Retractable Technologies reported its Q1 earnings on May 18th with a net income of $322,773 representing an EPS of $0.0045. The result reversed a loss of $129,221 or negative $0.01 per share in Q1 of 2019. Revenues of $11.2 million increased by 41% year over year.
(Source: Company IR)
While the U.S. domestic market represents about 75% of total sales, the international segment has been a growth driver with sales up 60% y/y in the last quarter. Demand has been strong for the company's "VanishPoint" syringe which comprises 85% of the total company sales. Other technologies including the "EasyPoint Needles" and blood collection sets utilizing similar retractable mechanisms have gained a share within the product mix. In the 2019 annual report, it was mentioned that recent modifications to the company's syringe and needle designs have extended the patent protection to between 2028 and 2032.
On a trailing-twelve-months basis, the operating margin has reached 8.1%, while EPS is positive at $0.095. The company has a strong balance sheet position, ending the quarter with $7.6 million in cash against $2.3 million in long-term debt. It's worth noting that the company has several series for preferred stock each with varying terms and redeemable prices. Preferred stock dividends have represented a payout of approximately $700,000 over the past three years and well supported by underlying cash flows. The takeaway here is that the company has overall solid fundamentals with positive operating and financial momentum.
Data by YCharts
U.S. Government Contract
The major development following the quarter-end was the May 1st announcement of an $83.7 million contract with the U.S. Department of Health and Human Services "HHS" to supply automated retraction safety syringes. The order is for delivery later this year and through 2021, although more specifics have not been disclosed as of the latest earnings report:
Retractable expects to increase both domestic and foreign production and add additional personnel in response to the delivery order. Retractable expects to perform under this delivery order during 2020 and a portion of 2021. Retractable expects that the order relates to the novel coronavirus pandemic.
News reports suggest the government is looking to secure supplies of necessary needles for a future widescale COVID-19 vaccination program. It's estimated over 850 million needles and syringes are required to deliver vaccines which are more than any individual company can handle.
Other syringe manufacturers, including major players like Becton, Dickinson and Company (BDX), Cardinal Health (CAH), and privately-held Marathon Medical Corp. have also been tapped as suppliers by the HHS to meet the extreme demand. For Retractable, compared to revenues of $45 million over the past year, this contract is a game-changer. The company is increasing production and adding personnel to meet requirements.
(Source: Company IR)
Needlestick Crisis
The company highlights as an investment thesis and demand driver, an increasing awareness over a global "needlestick crisis". The purpose of the retractable devices is to effectively reduce the risk of exposure associated with needlestick injury and device-reuse for the protection of both healthcare workers and patients. According to the Retractable website.
Worldwide needlestick injuries cause millions of exposures annually to HIV/AIDS, hepatitis B virus (HBV), hepatitis C virus (HCV), and many other bloodborne diseases. It's estimated that over 320,000 needlestick injuries occur every year in the United States. There are more than 20 bloodborne pathogens that can be transmitted by needlestick injuries.
The logistical challenge of delivering millions of doses of a vaccine in a high-volume setting highlights the value of the products where the risk of exposure as a fraction of a percent could represent thousands of accidents. Retractable Technologies' devices have long been recognized as superior but generally more expensive, competing with traditional syringes and needle alternatives. A long-term benefit of the U.S. government order is increased visibility of the product, which could drive accelerated growth with more widespread adoption across healthcare.
Analysis and Forward-Looking Commentary
Based on reported EPS of $0.095, over the trailing twelve months and revenue of $45 million, the stock is trading with a P/E of 67x and a price to sales of 4.6x. The context here is the solid revenue growth of 41% y/y in the last quarter, which did not include the more recent government order. Even considering the surge in the share price in recent months, valuation remains reasonable, in our opinion, for a quintessential growth stock with a quality product and a solid balance sheet.
Data by YCharts
While the company does not provide earnings guidance and there are no published consensus estimates, it's clear that profitability is set to materially benefit over the next year, considering the HHS contract is in addition to its regular business and organic growth.
Without specifics on the timing of the HHS order cash impact, we assume the entire amount would be filled over the next year. Estimating organic revenue growth of at least 20% from existing and new business, the company is on track to generate upwards of $140 million in sales over the next twelve months, including the $84 million order. By this measure, the stock with a current market cap of about $205 million is trading at approximately 1.5x forward revenue
Assuming a flat gross margin of 32% and a profit margin of 8% from current levels over the past year, we estimate RVP could earn at least $0.40 per share over the next twelve months implying a forward P/E of 16x. There is some uncertainty related to necessary investments in expanding production, but it's also likely there is an upside to operating margins overall from the scale benefiting.
Keep in mind that the HHS order is not seen as recurring and more of a one-time boost. This is one explanation for the relatively modest growth premium implied by the market on the forward outlook. However, it's still possible the company could see similar contracts from other health agencies worldwide through next year. Updated company guidance with more specifics on the deal and earnings impact will be important monitoring points.
Verdict
We rate shares of RVP as a buy with a year-end price target of $8.00 representing 26% upside from the current level. The implied market value at our price target of $260 million is approximately a 1.9x forward price to sales multiple on our revenue estimate for the company, including the order from HHS and organic sales growth trend. Tactically, we would be adding to shares on any move in the stock under $6.00.
The main risk to consider is that RVP remains a small-cap company with potentially volatile trends in quarterly sales in a competitive market segment against major corporations. There is a risk of execution should any setback arise from meeting the order requirements or potentially having to divert resources from existing business. Investors interested in the stock should only consider a small allocation and average into a position over days and weeks to improve a cost basis. We expect shares to exhibit some volatility and undergo consolidation in the near term until there is more clarity on the earnings impact from the recent deal which has not been discussed by management.
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This article was written by
15 years of professional experience in capital markets and investment management at major financial institutions.
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Analyst’s Disclosure: I am/we are long RVP. 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.
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Comments (10)
Your article failed to mention the CEO makes 5% royalties on gross sales. That means even if RVP's costs go up, the CEO gets paid on his royalties. Shaw made more in royalties last qtr. than the shareholders.
Your article fails to mention that the contract with HHS has very small margins.
You article fails to mention that patents started to run out in 2020, and the Chinese produce 80% of their production.