Summary
- Shares fall post Q3 earnings announcement despite top-line guidance hike.
- Margins beginning to be squeezed on higher costs.
- Fundamentals remain very bright. Mass approvals should spike the share price.
Intro
Glaukos Corporation ( GKOS ) announced its third-quarter earnings last week where we saw slight beats in both the company´s top and bottom-line numbers for the quarter. Furthermore, management tightened its full-year guidance to approximately the $279 million level, another positive endeavor. Shares though post the announcement failed to gain any traction and now find themselves below $50 a share. Despite the better-than-expected numbers, sales when converted to US dollars were lower than in the same period of 12 months prior. Furthermore, Galukos´ third-quarter net loss of $21.6 million was a far bigger loss than the -$14 million in the same quarter of 12 months prior. Suffice it to say, Galukos suffered negative top-line growth as well as some more margin erosion in Q3 which the market was not enamored with in the end.
What happened in Q3 is what core fundamentalists & growth investors need to keep in mind going forward. For example, if we pull up a technical chart of Galukos, we see that the visible pattern of lower lows and lower highs could easily mean that shares could test their May 2022 lows (Under $40 a share) if this present down move was to gain any type of traction. Core fundamentalists may believe this is unthinkable given Glaukos´ clear potential in transforming the vision space but the market not only takes Glaukos´ fundamentals into account but also areas such as the stock´s growth rates, recent margin compression, valuation, etc. Suffice it to say, the market needs to see a line of sight to some type of positive EBIT, and considering the company´s Q3 numbers, that line of sight is simply not there at present.
Glaukos trades with a sales multiple of 8+ because of the searing top-line growth the company has enjoyed over its recent history. The fundamentalist may state that in earnest, the stock´s fundamentals are better now than they were before. Under examination when one studies the company´s large pipeline and traction in existing product lines, there is a lot of truth to this belief.
Strong Fundamentals
For one, iPRIME & iAccess are new products that widen Glaukos´ line of products into the ophthalmic space. Then you have iStent infinite which could be a real game-changer in the glaucoma space given the sheer size of the market here. iStent infinite is expected to steer the industry away from conventional treatment programs although management has cautioned on the timeline of the system´s growth path. Plenty of work still needs to be done here concerning fee coverage which means shareholders need to remain patient.
Micro Invasive Glaucoma Surgery (MIGS) will definitely keep growing given its benefits and the Corneal Health franchise actually reported a quarterly record (Due to elevated patient access) in Q3. Then on the pipeline front, you had very encouraging results from the iDose TR trial which should result in the product being approved shortly along with Epioxa despite its delays is expected to also be approved as a corneal cross-liking treatment. The fundamentalists know that the above trends only scratch the surface with this company as multiple products are expected to be launched over time in areas of high unmet need and little competition.
Suffice it to say, given the value Glaukos is expected to bring to market, the company´s current valuation (8+ sales multiple) is definitely cheap. However, despite boasting significant gross margins, Glaukos has been feeling the pinch with respect to higher costs as well as forex headwinds. As stated above, the market needs to see a clear line of sight to profitability. This does not mean Glaukos has to turn a profit tomorrow but the market will need to see better sales growth or improving margins to price shares higher here once more.
Conclusion
Although Glaukos met its top and bottom-line estimates in its recent third quarter, shares failed to gain traction post the announcement. Top-line growth has waned somewhat and the comparable EBIT number also came in weak for the quarter. There is doubt about the clear potential Glaukos possesses with respect to its product line-up and its deep pipeline but market conditions may need to cooperate over the near term to stop this stock from falling further. We look forward to continued coverage.
For further details see:
Glaukos: Show Me The Money