2024-01-09 04:03:33 ET
Summary
- Glaukos Corporation's sales growth remains a key indicator for investors, with a 10% increase in Q3 leading to a 50% increase in stock value over the past 14 months.
- Long-term trends show that the stock has remained flat over the past 5 years despite impressive annual top-line growth.
- The company's franchises, particularly in international markets, show potential for sustained growth, but negative profitability and increasing share count remain forward-looking concerns.
Intro
We wrote about Glaukos Corporation ( GKOS ) back in November of last year when we pointed to the stock's lower margins after the release of Glaukos' third-quarter earnings numbers. Nevertheless, sales growth (and its ramifications) continues to be a key leading indicator for this stock as investors continue to weigh up the significant potential Glaukos Corporation continues to have in the glaucoma treatment market.
In fact, (just like Q3 last year), sales guidance was marked up in the third quarter of this present fiscal year due to a convincing 10% Q3 top-line growth rate compared to the same period of 12 months prior. Sustained top-line growth (but more importantly what is expected to come down the track here) has resulted in shares gaining over 50% in value since our most recent commentary approximately 14 months ago. Despite the significant up-move in 2023, we are going to remain on the side of caution & reiterate our 'Hold' rating for the time being.
Intermediate Technicals
Although strong rallies many times can lead to sustained trending moves, we believe it is important to monitor long-term trends to see if similar setups have taken place in past times. If we look at the stock's 5-year chart below, we see that shares are currently trading very close to where they were trading 5 years ago back in early 2019. Furthermore, it appears that shares are not going to break out above long-term resistance in this present move.
Therefore, investors have to ask themselves why shares are flat over 5 years when the average annual top-line growth rate for the company comes in at a very impressive 12.97%. The simple reason is that top-line growth has not been strong enough to offset Glaukos' negative profitability, growing debt & share count as well as the possibility of the company not gaining product approvals or sales traction at a scale that management may currently perceive. Remember, the market (surmised by the technical chart) knows what we know in that it accounts for every piece of known information when projecting what the share price should be. In effect, fundamentals are bullish when we have a rising share price and bearish when we have the opposite.
Fundamentals
On the recent Q3 earnings call, we saw how the company's 3 franchises (US glaucoma, international glaucoma, and corneal health) all grew in the quarter with both Corneal health and international growing by 12% & 23% respectively. The CEO delivered commentary surrounding the endeavor to expand access to iStent Infinite which continues to gain traction every quarter. The growth rate in the international segment demonstrates the long runway for growth for Micro-Invasive Glaucoma Surgery (MIGS) in international markets. Not only does management see sustained growth through elevated demand but also the possibility to bring therapies to the patient further up the treatment cycle meaning sales could potentially be turned over at a faster clip.
Photrexa continues to go from strength to strength in the corneal health franchise and the potential of Epioxa & recently approved iDose led to a key upgrade by JPMorgan last month.
Suffice it to say, taking into account Glaukos' growth numbers as well as the potent catalysts mentioned above, the stock seems to be very much priced concerning what is coming down the track here. However, despite the glaring need for the company's products, one cannot say that they are recession-proof. Economic contractions as we know can affect patients' disposable income plus reimbursements can also change over time on the back end.
Share count Continues To Increase
Furthermore, despite rising sales, Glaukos' trailing 12-month operating profit of -$120.8 million continues in negative territory by some distance. Negative earnings in recent times have resulted in negative cash flow which continues in turn to pressurise the balance sheet. This means total equity dropped to $477 million at the end of Q3 with shares outstanding now coming in at almost 49 million
Now bulls will state that temporary falling equity and a rising share count is a small price to pay for the growth Glaukos is expected to report. While this may be true, it is always a worthwhile endeavor to at least consider the other side of the investment. What we mean by this is that the longer it takes for Glaukos to finally start reporting positive profitability, the more likely investors' current investment stakes will be downsized over time. Whether this is done through more debt (lower book value per share) or an increased share count, the conclusion remains the same.
Conclusion
Therefore, to sum up, we are reiterating our 'Hold' rating in Glaukos Corporation despite the stock's aggressive rally in calendar 2023. Shares now look to be coming up against long-term technical resistance and book value continues to decline. Let's see what the fourth quarter brings. We look forward to continued coverage.
For further details see:
Glaukos: Remains A Hold Due To High Valuation And Negative Profitability