PEN - Penumbra: Appeal Improves Just Not Appealing Yet

2023-10-16 00:03:28 ET

Summary

• Penumbra's shares have nearly been cut in half after doubling in a six-month period, making investors cautious.
• The company has shown continued growth since its IPO, with revenues increasing ten-fold to a +billion run rate here.
• Despite solid second quarter results and a decline in share price, PEN's shares are still not considered cheap and lack strong valuation support.

Earlier this summer I called the run-up in shares of Penumbra ( PEN ) impressive, but at the same time believed that shares were running a bit hot. The company has seen continued and steady topline sales growth, which after years was starting to trickle down to the bottom line as well.

While the business was greatly applauded, the fact that shares essentially doubled in a six-month period, made me a bit cautious. Ever since, shares have nearly been cut in half while the business posted resilient results over the summer, helping the appeal improve a great deal, but I am just not yet willing to commit to the shares here.

About Penumbra

Founded in 2004, Penumbra launched its first neurovascular product in 2007, with the first peripheral vascular product launched in 2013. After these product debuts, the neurovascular and peripheral vascular company went public in 2015 at $28 per share. The company focuses on removing clots and treating aneurysms, unfortunately, huge markets with heart and brain vascular diseases and strokes are quite prevalent.

A relatively small player was competing against large and established players, but nonetheless, it managed to show continued growth. Since the IPO, shares have risen from levels around the $30 mark to a high of $300 in the spring of 2021, for good reasons as revenues ten-folded to three-quarters of a billion at the time as the business has gradually broadened out as well.

Diving Into The Results

In 2021, when shares first peaked at the $300 mark, Penumbra grew sales by 33% to $747 million as a GAAP operating loss was reported at $7 million. While the business was still heavy in investment mode, R&D expenses of $105 million were relatively modest, as some questions on profitability could be asked, even as adjusted earnings of $26 million were reported. This resulted in steep valuations as a $300 share price at the time granted the business a more than $10 billion valuation.

2022 revenues grew much less pronounced, up 13% to $847 million, with growth in part held back by a strong dollar. GAAP operating profits were reported at $6 million, as adjusted earnings actually fell.

After seeing slower growth in 2022, Penumbra guided for 2023 revenues to grow by 18% which would result in sales just in excess of a billion. With 39 million shares trading at $340 in June, the enterprise valuation of $13 billion was rather steep. This came even as the company hiked the full-year sales guidance to $1.05 billion following the release of the first quarter results in May, with revenues seen up 23-25% for the year.

Coming Down Again

After shares traded near the $350 mark in early summer, they have fallen to levels just below the $200 mark, now trading at $197 per share, to be precise. In August, Penumbra posted a 25.5% increase in second quarter sales to $261 million. Promising was the operating leverage delivered upon, with GAAP operating profits reported at nearly $18 million and adjusted earnings reported at largely similar levels.

On the back of the solid results, the company hiked the full-year sales guidance, now seeing sales at a midpoint of $1.06 billion, which comes after revenues in the first half of the year came in at $503 million already. That suggests greater revenues in the second half of the year, with earnings realistically trending at $2-3 per share. The company holds a net cash position of $220 million, equal to about $5-6 per share.

With a $7.5 billion enterprise valuation, the company trades around 7 times sales, which marks a premium at around 4-5 times sales at which established medtech players trade. This comes amidst subpar profitability, but this is improving rapidly, as the biggest driver that Penumbra has going for it is a current 25% growth rate.

Nonetheless, shares have fallen substantially. In fact, they have almost been cut in half since June. The easiest and most likely explanation, in my view, is that shares have reacted to strong momentum in the period before.

Other issues might be continued increases in interest rates, and the fact that many medtech names have been selling off substantially in recent times. Much of this is driven by the success of new weight-loss drugs which cause fear among food companies, as well as some medical device companies, although I wonder if this could impact Penumbra in a substantial way as well.

A Final Word

A near 50% pullback looks interesting, certainly after the second quarter results look rock solid to me. The combination of the strong results, but moreover the decline in the share price has certainly improved appeal a great deal, but shares are not cheap yet.

Sales multiples have rapidly come down a great deal. While earnings multiples are very demanding, multiples are rapidly coming down, but not enough to provide great support from an earnings yield of view. Thus not enough of a reason to buy the shares with conviction at this point in time and at current levels.

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