SYK - Globus Medical: Merger Overhang Lingering

2023-11-27 18:05:47 ET

Summary

• Globus Medical, Inc., a mid-cap medical device company, has seen its stock decline by over 35% in 2023 due mainly to its merger with Nuvasive.
• While the combination gives Globus Medical an over 20% market share in a growing market, analyst firms are skeptical of the purchase.
• The company does have a solid balance sheet and significant growth prospects.
• Time to pick up some Globus Medical, Inc. shares from the recent pull back?  An analysis follows below.

Who applause for you today, will turn their backs on you quickly tomorrow. ”? Kamaran Ihsan Salih.

Today, we put a mid-cap medical device company called Globus Medical, Inc. ( GMED ) in the spotlight for the first time. The stock is down more than 35% so far here in 2023. The company is nicely profitable, and analysts are predicting revenues will rise more than 50% in this fiscal year as well as in FY2024. Albeit a good portion of this growth is the result of the company's recently completed $3 billion merger with Nuvasive. The combination gave Globus roughly 20% of the overall spinal device market, where it competes with larger names like Medtronic ( MDT ) , Stryker ( SYK ) and a unit of Johnson & Johnson ( JNJ ) . Time to buy the dip in Globus Medical? An analysis follows below.

Company Overview:

Globus Medical is headquartered just outside of Philadelphia in Audubon, PA. The company is focused on providing healthcare solutions and various products for patients with musculoskeletal disorders. The stock trades just above $45.00 a share and sports an approximate market capitalization of $6.4 billion.

Third Quarter Results:

Globus Medical posted its Q3 numbers on November 7th. The company reported a non-GAAP profit of 57 cents a share. This was in line with analyst estimates at the time. Revenues rose 51% on a year-over-basis to just over $383 million, which was more than $50 million light of expectations. Excluding the purchase of Nuvasive, revenues rose over 10.7% from the same period year ago for the original Globus Medical business, to $281.2 million. Non-GAAP adjusted EBITDA was $121.9 million, just under 30% of net sales in the period. Standalone Nuvasive sales were $102.4 million, down a bit over two percent on a year-over-year basis.

Management raised its FY2023 sales guidance to range of $1.55 billion to $1.57 billion. This is up from $1.125 billion to reflect the now complete merger with Nuvasive. Leadership also projects Non-GAAP EPS for the year in a range of $2.30 and $2.39. Management also believes the combination with Nuvasive will produce record product innovations in 2024 and create a salesforce with little overlap, resulting in significant cross-selling opportunities and other synergies in the year ahead. Leadership doesn't expect significant cost reductions due to the merger, it should be noted.

Analyst Commentary & Balance Sheet:

The analyst community is not sanguine of the company's near term prospects at the moment. Since third quarter results posted, seven analyst firms, including Wells Fargo and Oppenheimer, have reissued Hold/Sell ratings on the equity. Price targets proffered range from $53 to $58 a share. Both RBC Capital ($70 price target) and Canaccord Genuity ($67 price target) have maintained Buy ratings on GMED.

Just over three percent of the outstanding float in the shares is currently held short. The decline in the stock has not elicited new purchases from insiders. The CFO sold nearly $2.3 million worth of equity in early February, when the shares were trading in the high $70s. A director disposed of nearly $2.5 million worth of shares when they traded in the mid $50s in mid-May. That is the only insider activity in the stock so far this year.

Globus Medical ended the third quarter with just under $470 million in cash and marketable securities on its balance sheet , according to its 10-Q filed for the quarter. The company has no long-term debt. Non-GAAP free cash flow for the third quarter came in at $29 million.

Verdict:

Globus Medical made $2.06 a share on $1.02 billion in FY2022. The current analyst consensus has profits growing to $2.30 a share in FY2023 as sales grow just over 50% to $1.55 billion. Similar sales growth is projected for FY2024 with earnings rising to $2.73 a share.

The stock of Globus Medical have been under pressure since the company announced the all-stock deal to acquire Nuvasive at a value of just north of $3 billion in February. The purchase news caused downgrades of GMED's stock at Needham, Loop, Piper Sandler, Truist, Wells Fargo, Canaccord and BTIG, mostly on integration and valuation concerns. Given current sales run rates, Globus paid more than seven times annual sales for Nuvasive even though it was an all-stock transaction.

Globus Medical, Inc. stock looks somewhat reasonably priced at approximately 20 times forward earnings. It should be noted that sales are projected to grow much faster than profits. The analyst community is also decidedly negative on the shares, and Globus Medical will need to allay their integration concerns over the next quarter or two.

Finally, I don't believe it was very 'kosher' that the company's CFO sold a good chunk of his stake in the firm a week before the Nuvasive merger was announced. Therefore, while this story is worth watching to see how it develops, I will remain for now on the sidelines with Globus Medical.

Life is not about the people who act true to your face, It's about the people who remain true behind your back .”? Moosa Rahat.

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