INMD - InMode: Strong Net Cash Position Sets The Stage For Opportunistic Buybacks

2023-09-27 11:00:00 ET

Summary

• InMode's stock price has dropped significantly from its peak in 2021, despite consistently strong operational performance.
• In the meantime, the company's strong profitability has led to InMode featuring a substantial cash position relative to its market cap.
• Coupled with its shares appearing quite undervalued, InMode is positioned well to execute highly accretive buybacks, signaling upside potential.

Over the past year, InMode (INMD) shares traded relatively flat. However, it's worth noting that the current price of $32.41 represents a significant drop of about two-thirds from its peak in 2021 when shares were trading near $95. Despite this price decline, InMode has consistently posted robust operational performance, marked by impressive growth and exceptional profitability.

As a result, the company has accumulated a substantial cash position and bolstered its equity value. Simultaneously, the stock's depreciation relative to the company's impressive growth has led to a widening valuation gap over time.

Consequently, it is plausible to anticipate that the company's management will be incentivized to leverage its cash reserves for opportunistic share buybacks at favorable prices. Such a move would likely prove accretive for investors.

A Quick Overview

For those unfamiliar with InMode, the company specializes in delivering state-of-the-art, minimally invasive surgical medical treatments. Specifically, the company stands as a dominant force in the global aesthetics market, where its products are skillfully employed by medical professionals to sculpt subdermal adipose or fatty tissue, predominantly in female patients.

Operating within a niche market, InMode is poised for continued expansion, all while securing a larger share of the overall industry pie. Its extraordinary growth in revenue and profits provides substantial evidence of its success.

Exemplary Growth Trajectory Despite Recent Macro Headwinds

InMode's growth trajectory is nothing short of astounding, driven by several pivotal factors. Central to this ascent is the surging popularity of InMode's solutions, further fueled by an ever-expanding portfolio, a relentless focus on research and development, and the strategic enlargement of its distribution network. Notably, InMode has also made strategic investments in its suppliers, resulting in the company developing a comprehensive distribution network.

For some perspective regarding InMode's growth trajectory, over the past five years (2017-2022), InMode has achieved a remarkable compound annual growth rate ((CAGR)) of 53.4% in its revenues . What's even more impressive is the company's ability to maintain this growth momentum, even in the face of a challenging macroeconomic landscape.

With consumer purchasing power expected to wane due to elevated interest rates and inflation levels remaining worrisome, one would expect a softening in discretionary spending - especially in services such as improving one's aesthetics.

However, InMode's recent performance challenges this preconception. In its latest Q2 report , InMode achieved an exceptional milestone, recording a quarterly revenue of $136.1 million, which represents a substantial year-over-year growth of 20%. Even more noteworthy is the management's optimistic outlook, foreseeing this positive trajectory extending throughout the second half of the year.

In fact, InMode's Q2 results exceeded prior expectations, seeding enough confidence in management to revise their projections upward. As a result, the company now anticipates generating revenues ranging from $530 million to $540 million in fiscal 2023. The midpoint of this range implies a notable year-over-year growth of 17.8% compared to last year.

Clearly, InMode is performing exceptionally in the context of operating a consumer-discretionary business in a tough macroeconomic environment.

Exceptional Profitability Helps Grow A Huge Cash Balance

Apart from InMode's impressive revenue growth, I have grown fond of the company due to its exceptional profitability. In turn, this has allowed the company to grow its cash balance, which I mentioned earlier.

Let's take a look at this!

So, generally, medical device companies enjoy healthy profit margins at scale. Still, InMode sets itself apart, with its margins being some of the heaviest among companies in the space. The company has consistently maintained gross margins between 83% and 87% over several quarters.

But how does InMode achieve such remarkable profitability? From what I understand researching the company, InMode's approach involves outsourcing the majority of its product manufacturing to trusted suppliers while retaining ownership of proprietary manufacturing equipment and supplier assembly lines. This lean and streamlined operation ensures efficiency.

Moreover, InMode essentially has $0 of debt on its balance sheet. This means that after covering operating expenses, a significant portion of its gross profits directly slides to its bottom line. Consequently, net income margins tend to hover between 35% and 45%. Very few companies out there can post such rich margins while growing this fast!

Due to InMode's lean, CAPEX-light business model, as well as the fact that the company has zero debt on its books to repay, its cash pile has been accumulating.

InMode's net cash position has grown steadily to reach $629.4 million . While this might not appear like a huge amount at first glance, don't forget that we are talking about a company with a market cap of about $2.7 billion. It is clearly a massive cash position, given the nature of its business model and the lack of matching liabilities.

Prospects for Opportunistic Buybacks Offers Upside Potential

Taking into account InMode's absence of imminent maturing liabilities, its substantial cash reserves present numerous advantageous avenues for enhancing shareholder value.

Among these, one option entails the company's acquisition of a smaller competitor, while a more accretive alternative involves direct repurchase of its own stock. In essence, with its current undervaluation, management may struggle to identify a more lucrative capital allocation strategy.

With shares trading at a P/E of just 12.1 based on this year's projected EPS, InMode would be buying its own shares at a significant discount.

Even in the event of an EPS growth deceleration to the mid-teens in the forthcoming years, a conservative projection by Wall Street in my perspective, this investment proposition remains compelling.

How frequently do you encounter a company boasting double-digit growth, accompanied by net margins exceeding 40%, and yet trading at such an appealing discount? Such opportunities are indeed rare.

Given that InMode's return on equity has averaged 45.85% over the past five years, repurchasing shares at a P/E of 12 should be very accretive for common shareholders. This should act as a significant catalyst for upside, in my view.

Takeaway

Overall, InMode stands as a remarkable success story in the medical device industry, with impressive growth and profitability despite challenging economic conditions.

The company's substantial cash reserves, along with its undervalued stock, position it for potential shareholder-friendly moves. In particular, buybacks should unlock significant upside for investors.

Add its clean balance sheet, high profit margins, and a history of excellent performance, and InMode's future prospects look promising for investors seeking both growth and value in their portfolios.

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