PEN - Penumbra: Impressive But Running A Bit Hot

2023-06-22 14:10:31 ET

Summary

• Penumbra, Inc. has seen continued, steady, and impressive top-line sales growth over the past decade.
• This sales growth is now resulting in modest profits on the bottom line as well.
• I like the business a lot, but Penumbra shares have more than doubled in a six-month period, pushing up expectations a bit too much for me.

Late in 2017 I called shares of Penumbra, Inc. ( PEN ) an under-covered long-term growth play. I believed that the medical device company was interesting, as it was focusing on large segments of the vascular market.

After launching its first product a decade ago (at the time), the company has grown to a $350 million revenue run rate. Despite solid top line sales growth, accompanied by no realistic earnings, a 9 times sales multiple felt a bit rich.

A Recap

Back in 2017, Penumbra was an interesting medical company which targeted the neuro and peripheral vascular disease market, as the company had gone public in 2015.

After it was founded in 2004, the company launched its first neurovascular product in 2007 and the first peripheral vascular product in 2013, having introduced improved versions in these categories over time. The company focuses on removing clots and treatment of aneurysms, as unfortunately these are very large markets, with certain types of strokes and heart or brain vascular diseases being very prevalent.

The relatively small player competing against large and established players like Stryker, Medtronic, J&J and Boston Scientific, as the growth of its business suggested a strong competitive positioning.

Late in 2017, the company was on track to generate about $350 million in revenues, with the results on the bottom line coming in near breakeven levels. With some 35 million shares trading at $93, the market value stood at $3.2 billion, or $3.0 billion if we factor in net cash holdings held at the time.

Trading at $93, the company has seen shares more than triple from the IPO price of $28 in 2015, as the premium and momentum looked a bit rich. I was hopeful to be able to buy the shares on dips, but that unfortunately never really materialized.

A Home Run

Since late 2017, shares have made huge advancements. Since the summer of 2018, shares have traded around the $150 mark, as shares rose to the $300 mark in 2021. After a very substantial pullback to the $130 mark in the summer of 2022, shares have recovered to fresh all-time highs around the $340 mark here today.

Forwarding to spring 2022, the company has seen strong growth in 2021. Revenues for the year 2021 rose by an impressive 33% to $747 million which is encouraging, although that a $7 million operating loss was not too impressive. Moreover, while R&D efforts were aimed to grow the business, they can only be in part attributed to the lack of earnings, as these R&D expenses "only" came in at $105 million.

Note that the business posted an adjusted profit of $26 million, or $0.69 per share, with the difference mostly stemming from some adjustments made in relation to R&D expenses, vesting of options and amortization charges.

With 37 million shares outstanding, the company commanded a $7.4 billion valuation at the time. This includes a quarter of a billion net cash position, but adjusted for this, multiples were steep at around 9 times sales, amidst no real earnings reported. Alongside the earnings report, the company guided for a healthy 15-17% increase in sales to $860-$875 million in 2022.

Forwarding to early this year, we see reported sales up 13% to $847 million, coming in below the initial guidance for 2022, although that shortfall is due to the strong dollar, with sales otherwise coming in around the lower end of the range. Amidst the company cutting back on R&D expenses to the tune of around twenty-five million (following some one-time expenses last year), the company was able to post an operating profit of $6 million for the year, although that adjusted earnings fell to just $0.16 per share.

Promising was that the business guided for sales growth of last year 18% in 2023, which should translate into sales of at least a billion. It is clear that the market is running ahead of itself, with nearly 39 million shares now commanding an enterprise value of around $13 billion at $340 per share.

In May, the company posted solid results for the first quarter, with sales up more than 18% to $241 million, despite a small dollar headwind. The company has finally seen some operating leverage of the expenses base, with operating profits of $8 million improving by about twelve million versus last year. The company clearly sees momentum continuing with sales seen a midpoint of $1.05 billion, revealing a 23-25% expected increase in sales, meaning that the business is actually accelerating sales growth and is looking to become really profitable.

What Now?

The reality is that I am very appreciative of the fundamental performance of the business, as shares have tripled since 2017. In fact, shares have even done a bit better after a great run in the shares over the past half a year.

The issue is that a high single-digit sales multiple has expanded to about 12-13 times forward sales here, aided by a new acceleration of growth and some realistic margins reported here. That said, shares have more than doubled from a $150 level as recent as December, which simply feels too rich and quite frankly I am not in the business of chasing the shares here.

That said, the continued growth and pathway to realistic earnings makes it interesting to keep a close eye on Penumbra, Inc. stock, certainly in case of substantial setbacks from here.

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