Tandem Diabetes Care: A Difficult Valuation To Justify

Summary

• Tandem Diabetes Care has demonstrated significant growth on its top line in recent years and its bottom line has improved drastically.
• Growth continues through its 2021 fiscal year and it's likely the firm will only grow further in the years to come.
• But shares look very expensive and even continued growth could make the company's price difficult to justify.
• Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »

AndreyPopov/iStock via Getty Images

Diabetes is a terrible medical condition that far too many people in the US and across the globe are afflicted by. Not only can treating it be costly and dealing with it be a pain, it can also lead to a death sentence in some cases. So naturally, for a company that wants to do well by doing good, getting involved in the space can be quite appealing. And one firm that has generated significant growth in this market in recent years has been Tandem Diabetes Care (NASDAQ:TNDM). The firm has achieved rapid revenue growth and, recently, positive cash flows. If current trends persist, the future for the business is undeniably positive. Ultimately, I suspect the firm will generate attractive value for its shareholders. But such a strong growth prospect with a bright future does not come cheap. Shares today are priced at extremely high levels. Even if we assume that growth will remain attractive for the next few years, the stock still looks pricey. So although this is definitely a growth play, investors who are price conscious should be wary about this opportunity.

A play on a global problem

According to the management team at Tandem Diabetes Care, taking data from the International Diabetes Federation and from the Centers for Disease Control and Prevention in the US, there are millions of people across the globe afflicted by diabetes today. Worldwide, there are an estimated 24.2 million people who suffer from Type 1 diabetes. Of these, 1.6 million or located here at home. Type 2 diabetes is even more prevalent, working out to 206.8 million people across the globe. Of these, 25.4 million are located in the US. For those who focus on insulin only therapies in the Type 2 category, the worldwide figure is 5 million while the domestic figure is 1.5 million.

This is a massive market for any company to play in. And Tandem Diabetes Care has proven itself to be a worthy competitor. The company operates today as a medical device firm. The focus is on developing and selling insulin pump technologies, as well as complementary technologies like its new t:slim X2 hardware platform that is currently software updatable. According to management, this particular model is the only pump that offers remote software updates that are commercially available. Some of the software on here provides features such as predictive low glucose detection and the ability to help increase a user's time in their targeted glycemic range. The company's technology also includes a web-based data management application that provides users, their caregivers, and their health care providers with a way to display diabetes therapy management data that comes directly from their pumps.

This technology has proven to be wildly successful for the company and its shareholders. In the four years ending December 31st of 2020, the company had shipped in excess of 215,000 insulin pumps, with 170,000 of these being shipped to customers in the US, while the remainder, about 45,000 in all, being shipped to international markets. As a result of the company's success, revenue in recent years has soared. Back in 2016, for instance, the company generated sales of just $84.25 million. By 2020, sales had grown to $498.83 million. That growth continued into the 2021 fiscal year, with sales in the first nine months of the year totaling $429.80 million. That represents an increase of 29.9% compared to the $330.77 million generated the same time one year earlier.

*Created by Author

Likewise, the bottom line for the company has gradually improved over time. The company went from generating a net loss of $83.45 million in 2016 to generating a loss of just $34.38 million in 2020. In the first nine months of the 2021 fiscal year, the company generated a profit of $4.76 million. That compares to a $51.38 million loss achieved the same time one year earlier. Of course, we should pay attention to other measures of profitability as well.

Operating cash flow, for instance, went from a negative $61.17 million in 2016 to a positive $24.67 million in 2020. In the first nine months of this year, it came in at $91.72 million. That compares to a modest $9.43 million generated one year earlier. On an adjusted basis, operating cash flow went from a negative $61.29 million in 2016 to a positive $61.26 million in 2020. That adjusted equivalent came out to $62.91 million in the first nine months of 2021, up from the $25.44 million achieved a year earlier. Meanwhile, EBITDA grew from a negative $59.70 million in 2016 to $71.02 million in 2020. Its results for 2021 so far have totaled $60.03 million. That is nearly 10 times the roughly $7 million the company generated in the first nine months of 2020.

*Created by Author

For the full 2021 fiscal year, management has provided some guidance. According to the firm, sales for the year should be between $685 million and $695 million. At the midpoint, this implies a 38% increase year over a year. It's also higher than the previously anticipated midpoint of $677.5 million. A significant chunk of this growth should come from international sales, which are forecasted to more than double year over year. Overall international sales should be between $168 million and $175 million for 2021. Estimates for EBITDA come out to $103.5 million, while my own estimate for adjusted operating cash flow comes out to about $151.5 million.

Shares are very expensive

Using this data, we can price the company. On a price to operating cash flow approach, the company is trading at a multiple of 64.2. Although this is astronomically high, it is better than the 158.7 multiple seen in 2020. Meanwhile, the EV to EBITDA multiple of the company should be 90.9, down from the 132.4 if we used the 2020 figures. Clearly, these numbers are outrageously high. But what investors are banking on is continued strong growth. There's no doubt that the company will continue to grow, but the question is whether that growth will justify these multiples today. If we assume, for instance, that the company can grow its operating cash flow and its EBITDA at an annualized growth rate of 20% for the 2022 through 2026 fiscal years, then the price to operating cash flow multiple would still be a lofty 25.8, while the EV to EBITDA multiple would be 36.5.

*Created by Author

To put the valuation of the company in perspective, I decided to compare it to some other medical device firms. On a price to operating cash flow basis, these companies ranged from a low of 19.2 to a high of 640.8. One of the five prospects did not have a positive price to operating cash flow multiple, resulting in two of the five companies being cheaper than our prospect and the other two being more expensive. I then did the same thing using the EV to EBITDA approach, resulting in a range of 15.7 to 6,520. Once again, two of the companies were cheaper while the other two were more expensive.

Company	Price / Operating Cash Flow	EV / EBITDA
Penumbra (PEN)	640.8	232.2
NovoCure Limited (NVCR)	66.2	6,520.2
Globus Medical (GMED)	26.6	22.7
Envista Holdings Corporation (NVST)	19.2	15.7
ShockWave Medical (SWAV)	N/A	N/A

Click to enlarge

Takeaway

Due to the extreme disparity in pricing when looking at comparable firms, I would not rely on a comparative analysis to determine whether or not Tandem Diabetes Care is appropriately valued. On an absolute basis, shares look astronomically high. I know that investors are pricing in future growth and that future growth is likely to play out. This is great for long term investors. But if that growth is slower than what the market anticipates, shares will likely fall significantly. At some point, the company will probably generate an attractive return for its investors even if they buy in today. But for those who don't want to wait for the fundamentals to catch up to the price, I would definitely consider looking elsewhere for opportunities.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

Comments

[Cora Schlesinger]

@Daniel Jones The photo here is of the a Freestyle Libre CGM, not an insulin pump.

[Out_on_a_limb]

I don't want to be harsh, but such an article is uninformed and should be overlooked by investors in this area. In fact TNDM is an excellent support right now, as it has sailed through FDA, built a distribution network, and signed collaborations with continuous glucose monitoring suppliers. Comparison should be made with PODD, and anyone can judge who is more richly valued as PODD grows at half the rate of TNDM (40% for the latter).

[donzoab]

The best of breed always trades at a premium and while agree tndm isn’t cheap growth is accelerating and they have crushed analyst numbers 8 qtrs in a row. I expect north of $715mm in revenue due to international expansion and problems competitors like mdt and PODD are having. The companies you compare them to are just not even in the same space so makes no sense. SWAV has nothing to do with diabetes care. Track McDonald’s and Coke stock. As these providers of death continue to sell their horrible products consumers will continue to swell , become obese and develop diabetes.
Tndm fair value is $185.

[Cora Schlesinger]

@donzoab Agree w/ your assessment, esp. international growth has further to increase than US. Highly regarded (loved) by users, w/ almost a cult following of younger diabetics-- who have a higher pump penetration rate than adults. Good retention factor at end of 4-year pump cycle, w/ many defectors from other manufacturers. 1st to bring touch screens to market. Endos are also enthusiatic about pump design and function.