ICU Medical: Attractive Valuation And Cheap Optionality

The Company

ICU Medical, Inc. (NASDAQ: ICUI) develops, manufactures and sells innovative medical technologies used in vascular therapy, oncology, and critical care applications. ICU Medical's products improve patient outcomes by helping prevent bloodstream infections, protecting healthcare workers from exposure to infectious diseases or hazardous drugs and monitor continuous cardiac output of critical care patients. The Company's complete product line includes custom I.V. systems, closed delivery systems for hazardous drugs, needleless I.V. connectors, catheters and cardiac monitoring systems. ICU Medical is headquartered in San Clemente, California

Valuation

The share price sold off recently due to missing earning expectations and lowering guidance for fiscal year 2013. Company has a very healthy balance sheet with no debt and $244 mil in cash. Based on a July 18, 2013 closing price of $68.53 per share, its market capitalization is $1,002 million and enterprise value is $758 million. Based on FY 2012 results, ICU Medical trades at a P/E, P/S, and EV/EBITDA multiples of 24.3, 3.17, and 9.4, respectively.

Over the last five years (2008-2012) company's share price significantly outperformed its peers (NASDAQ Medical Devices Index) and delivered total cumulative return of +69.2% compared to return of +7.1% of a peer index.

For the full fiscal year of 2013, company said it expects to generate revenue in the range of $320 million to $325 million, compared to the previous guidance of $330 million to $337 million. The company expects its diluted earnings to be in the range of $2.50 to $2.60 per share, compared to the previous guidance of $2.70 to $2.85 per share. The company expects to generate operating cash flow in the range of $45 million to $50 million. Based on a company's guidance of earning per share and recently reported second quarter 2013 results (annualized), it currently trades at a P/E, P/S, and EV/EBITDA multiples of 26.9, 3.1, and 11.6, respectively.

Relative Value

Company competes with other manufacturers of infusion therapy, oncology and critical care products. This includes such companies as Baxter, CareFusion, Becton Dickinson, B. Braun, Edwards Life Sciences and others. On a relative value basis, ICU Medical trades at a comparable valuation to its peers: it has an estimated EV/EBITDA multiple of 11.6 compare to an average multiple of 11.5 for the peer group. Peer group includes CareFusion (NASDAQ: CFN), Baxter International (NYSE: BAX), Becton Dickinson and Company (NYSE: BDX), and Edwards Life Sciences (NYSE: EW) and is based on a data provided on Yahoo Finance/Capital IQ).

Cheap Optionality

One way a stock has optionality is if it can deliver big results when certain seemingly unlikely things occur. One of such surprising events is a buyout or acquisition of a business. When Joshua Friedman, co-chief at Canyon Partners, which manages $20 billion, spoke at Grant's Spring Investment Conference (2011) he mentioned optionality idea. "Go long optionality," he said. "Invest not only in cheap assets, but assets where you get optionality cheaply." (Source)

On May 10, 2013 it was reported by Bloomberg that company is working with JPMorgan Chase & Co on finding suitors. According to article, some analysts estimate that ICU Medical could be valued at about $80 per share, implying a 17% premium to July 18th closing price of $68.53. ICU could attract private equity firms, as well as large medical-device makers. Chairman and CEO may be among the beneficiaries of a sale: according to data compiled by Bloomberg, he is the company's biggest shareholder with an 11% stake.

An interesting fact to note here is that one of company's competitors itself, CareFusion, attracted the interest of private equity funds (according to April 15, 2013 Bloomberg article). Again, recently it was also reported by Reuters on June 08, 2013 that ICU Medical drew interest from CareFusion which is carrying out due diligence and is weighting an offer. There is of course no guarantee that this process will indeed results in a transaction.

Conclusion

Specific types of individual investment opportunities have valuable optionality "embedded" into them and can help achieve attractive returns. ICU Medical is a profitable company, has recurring revenue stream (as hospitals constantly order its products because they are discarded after a patient uses them), produces a healthy cash flow and trades at an attractive valuation. This can limit potential downside and provide an attractive return to a patient and conservative investor. At the same time, due to significant amount of cash on the balance sheet that is available, possibility exists that the company will be acquired or will initiate some active step to return capital to shareholders such as a buyback of its stock or a special dividend

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ICUI 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.