Senseonics: First Part Of 2021 Crucial

Summary

• The company just announced its Q4 numbers. Forward looking 2021 guidance is encouraging.
• The balance sheet has been strengthened considerably in recent times from multiple financings.
• Shares are oversold and should bottom quickly. The first few quarters of 2021 are vital to keep the momentum going.
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In discussion with a colleague recently on trading and investing, we were comparing low priced stocks (which trade with high implied volatility) with low-price value plays. What we mean by value plays is companies which have sound financials and a very attractive valuation but for some reason are out of favour with the market. The discussion revolved around which “type of company” is better for trading purposes. On one hand maybe you have a $3 company trading with very high levels of implied volatility. This company though may have no income (or very little to speak of) which obviously increases risk for the investor or trader. Furthermore, when a company is not generating either positive earnings or positive cash/flow, it puts a “time element” on proceedings. These speculative type companies many times trade with very high levels of implied volatility because the fear associated with respect to future price-movement is very high.

This fear though enables traders reduce risk more than in the value play due to being able to collect far more option premium from associated options. One stock which we wrote about recently is Senseonics (NYSE:SENS). This stock came to our attention due to its spike in implied volatility which took place in mid-January. This company fits the bill perfectly with respect to being a firm which still sports high levels of high implied volatility but does not have a proven cash-generating business which supports the company´s ultra-high valuation. Let´s go through the recent fourth quarter earnings report to see if the company has significant downside risk or not at this juncture. Remember, when selling option premium to reduce cost basis, our main focus is the downside as we are essentially capping our potential gains to the upside.

First off, SENS beat bottom-line consensus by $0.01 (EPF of -$0.05 reported) and sales of $3.9 million also beat analysts’ expectations in its recent fourth quarter. CEO Tim Goodnow really spoke up the Eversense system and how significant value would be created going forward as a result of the firm´s collaboration with Ascensia. To recap, what we liked prior to the company´s fourth quarter numbers was the following

• Through a series of stock-sales, the company was able to raise over $170 million in total. Obviously, this quantity of capital buys the new partnership time although Ascensia will no doubt push the Eversense offerings aggressively over the quarters to come. At the end of January, SENS´s cash, cash equivalents and restricted cash on the balance sheet topped $187 million.
• Ascensia has skin in the game ($35 million thus far). This means a lot as this company is proven in the commercial side of the diabetes space so it wouldn´t have put up this capital if it didn´t see significant potential in Senseonics´offerings. As noted in our previous article, an extra $15 million is expected to follow when and if the 180-day product gets approved. This is a big deal as the longer duration sensors will generate the most demand going forward. The question is how much has the market priced in this approval into the shares at present.
• Being able to literally hand over your sales and marketing wing of the business was also going to produce synergies when the third party came on board. The CEO stated that well over $40 million per year is expected to be saved in sales and marketing expenses which obviously should benefit the income-statement going forward.

The points we have mentioned above though are assumptions and nothing concrete that we can take to the bank. What we did see in the fourth quarter earnings report was news on the increase in the Patient Access Support numbers due to increased coverage from more providers. Eversense also gained ground with respect to being added to the Medicare beneficiary list. This opens up another avenue for new patients of which Ascensia has already drawn up various programs to build on.

If we look at the chart of SENS, we can see that shares rallied above $5 a share in February before finally bottoming below $2 a share on the 5^th of March last. Shares now though seem to have found support and have formed a swing low. This is important as the January gap should provide support for the share-price going forward. Suffice it to say, any significant drop below $1.50 a share would be bearish in our view at this juncture.

The new-look Senseonics is expected to return between $12 and $15 million in global sales and between $60 to $65 million of operating cash/flow. The positive cash/flow number will go a long way in convincing the market that the firm has turned the corner especially if sales come in above target. The potential here is evident. The market which Senseonics & ADC are selling in to is a $5+ billion market which continues to grow at strong double digit growth percentages every year. Although the company has a healthy installed base in Europe, the market will be watching the US market closely to see if the firm can gain traction there quickly.

Therefore, to sum up, although Senseonics seems to have everything in place to drive sales of its Eversense system forward, share really have to take out their February highs convincingly before we can state that a bull market has begun in earnest. We look forward to continued coverage.

Analyst’s Disclosure: I am/we are long SENS. 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.