OFIX - Orthofix Medical: Under New Management

2023-12-03 07:17:52 ET

Summary

• Orthofix Medical Inc. has had a lackluster performance in 2023 and has brought in a new CEO to turn the company around.
• The company's orthopedics business segment provides products for orthopedic conditions unrelated to the spine, while its spinal business segment manufactures bone growth stimulator devices.
• The company is still navigating through a merger that was announced in late 2022 but the stock is potentially cheap on a price to sales valuation.
• An analysis around Orthofix Medical follows in the paragraphs below.

Plants are more courageous than almost all human beings: an orange tree would rather die than produce lemons, whereas instead of dying the average person would rather be someone they are not ."? Mokokoma Mokhonoana

Today, we take our first look at Orthofix Medical Inc. ( OFIX ) as this small cap goes in the spotlight. The stock has had a lackluster performance here so far in 2023, to say the least. Orthofix has been somewhat of a soap opera for its investors over the past year as well. The company has just named a new CEO from outside the firm to help turn Orthofix Medical around. Will this be enough to right the ship at Orthofix Medical? An analysis follows below.

Company Overview:

This spinal focused and orthopedics small cap concern is headquartered just outside of Dallas in Lewisville, TX. The company's orthopedics business segment provides products and solutions that allow physicians to treat a variety of orthopedic conditions unrelated to the spine, which design, develop, and market the orthopedic products used in fracture repair, deformity correction, and bone reconstruction procedures. Its spinal business segment manufactures and distributes bone growth stimulator devices for enhancement of bone fusion, including adjunctive and noninvasive treatment of cervical and lumbar spine procedures. The stock trades just north of $11.00 a share and sport an approximate market capitalization of just north of $400 million.

In mid-September, the board of directors at Orthofix terminated for cause the company's CEO, CFO and Chief Ethics and Compliance Officer. The company also postponed its Investor Day that was planned for the following week. In October of last year, the company announced an all-stock merger with SeaSpine (SPNE). The merger was expected to generate at least $40 million in annualized cost savings at the time it was announced. Late in 2022, Orthofix received an unsolicited bid from two private equity firms that valued the stand-alone company at $24 a share. In retrospect, it might have been better for investors if Orthofix would have more seriously considered that potential deal.

As an article stated on Seeking Alpha in September that came out soon after management changes were announced, the merger has not produced its desired outcomes to date. The comes even as management is eyeing at least $50 million in various cost synergies from the merger by FY2025. $30 million of these are expected to be achieved by the end of this fiscal year. Over 80% of the combined company's sales come from the United States.

Third Quarter Results:

The company posted its Q3 numbers on November 8th. Orthofix Medical had a non-GAAP profit of 7 cents a share, more than a quarter a share better than expectations. Revenues rose just over 61% on a year-over-year basis. This is how sales broke down via the company's key business lines.

It is important to note a couple of things. The first is revenues only increased eight percent on a pro forma basis when normalizing for a one-time stocking order that occurred in the third quarter of 2022 for SeaSpine. This was for a final Spinal Implant stocking orders to European distributors prior to SeaSpine's exit from the European market.

The second is that on a GAAP basis, Orthofix Medical Inc. had a net loss of $28.9 million for the quarter. A lot of this was driven by merger related expenses like severance. Management provided the following guidance for this fiscal year.

Analyst Commentary & Balance Sheet:

Since mid-October, Roth MKM ($12 price target), Stifel Nicolaus ($14 price target), BTIG and JMP Securities have all reissued Hold/Neutral ratings on the stock. There are no current analyst firm Buy ratings on this stock that I can find. There was a rash of analyst downgrades from the analyst firms above after the management purge in mid-September.

Approximately 12% of the outstanding float in the shares is currently held short. A director purchased just over $100,000 worth of new shares on September 14th. Three other insiders sold approximately $230,000 worth of equity collectively in the first half of this year. That is in the only insider activity in the shares so far in 2023.

Orthofix Medical Inc. ended the third quarter with just over $33 million in cash and marketable securities on its balance sheet. The company had also made use of $70 million of a five-year credit facility as of the end of September. It has since withdrawn another $9 million from that facility in October. The company then entered a new four-year credit facility in November that consisted of a $100 million senior secured term loan, a $25 million senior secured delayed draw term loan facility, and a $25 million senior secured revolving credit facility. This was used to fully pay off Orthofix's previous credit facility.

The company had negative free cash flow of $86.1 million through the first nine months of 2023, which is important to note. Again, a good deal of this is merger related.

Verdict:

The company made 30 cents a share of profit on $460 million worth of revenue in FY2022. The current analyst firm consensus is expecting a loss of 14 cents a share in FY2023, even as sales soar to $740 million. They see similar losses in FY2024, even as revenues come in right at $800 million.

The stock could be outright cheap based on it selling at approximately 50% of annual sales. Bone Growth Therapies (28% of overall sales) has seen three straight quarters of sales growth in the teens as well. Of course, any potential rebound in the stock is dependent on the new management team being able to right the ship, reduce the current cash burn and eventually get Orthofix back to profitability.

Analyst firms are currently skeptical on any potential turnaround and given the company's history over the past year or so, that skepticism seems warranted for now. The firm is firmly in 'show me' territory. So, in conclusion, Orthofix is potentially a turnaround story to keep an eye on, but it is not investable at this time.

A true friend doesn't have guts; they beat you up and later plead with you to beat them back ."? Michael Bassey Johnson

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