2023-11-08 17:09:15 ET
Summary
- ICU Medical, Inc. has faced disappointment and poor performance due to previous acquisitions and lower-quality business activities.
- The company's recent acquisition of Smiths Medical Business did not meet sales expectations, leading to a shortfall in earnings.
- ICU Medical's stock has declined significantly, and its leverage ratios are high, causing concerns amidst sales declines of the business.
In August, I believed that ICU Medical, Inc. ( ICUI ) delivered on its next disappointment after the company had made two larger deals in recent years, both of which have backfired in a big way. The leverage incurred with the latest deal is still haunting the business, as the poor quality of the acquired activities hurt the top line results as well, resulting in leverage concerns, all of which makes investors quite cautious here.
While shares are down a lot already and the situation might be manageable, I do not have too much confidence given the poor track record of the firm. That being said, I like the potential of ICU here in case the business can stabilize and recover, as I am looking at upside calls to potentially get involved at some point in time.
Some Perspective
ICU Medical announced a $1 billion deal for Hospira Infusion Systems in 2016, as the purchase price was cut to $900 million before the deal even closed. While that discount was welcomed, it was a testament to the big shortfall in the performance of the acquired business.
Nonetheless, shares rallied from levels around the $100 mark in 2016 to highs around $300 in 2018, after the business grew from less than $400 million in sales to $1.3 billion in revenues, although adjusted earnings rose in a very modest fashion towards $6 and change per share.
After some disappointments, ICU was a $200 stock in September 2021, by which point in time the company had deleveraged and regained a modest net cash position, while the business posted earnings around $7 per share. Following the integration of the Hospira assets, the company announced another big deal as it paid $2.35 billion to acquire the Smiths Medical Business, while ICU itself was valued around $4 billion.
The deal was set to add $1.2 billion in sales derived from infusion systems, vascular access and vital care, creating a more complementary portfolio of IV therapies. Net debt was set to jump to $1.4 billion, resulting in a pro forma leverage ratio around 3 times.
The deal had the potential to boost earnings from $7 per share to $13 per share, as shares rallied from $200 to $270 upon the deal announcement, as that was a bit too optimistic in my eyes, given the execution risks involved. The deal with Smiths closed in January 2022, and early in 2023 the company posted 2022 results which showed that sales rose from $1.32 billion to $2.28 billion. Flattish organic sales growth implied that Smiths added less than a billion in sales, softer than the anticipated sales contribution at the time of the deal announcement.
Softness was set to continue as 2023 EBITDA was only seen at $375-$425 million, despite some synergies to be realized, failing short of the pro forma numbers around half a billion. This shortfall and higher interest expenses made that earnings were seen at just $5.75-$7.25 per share.
2023 - A Train Wreck
In May, ICU posted a 5% increase in sales to $568 million as EBITDA improved to $102 million. Second quarter sales fell 2% to $549 million, weighing on earnings. This meant that the company cut the higher end of the EBITDA guidance from $425 million to $405 million, with earnings seen at $6.00-$6.85 per share. With net debt reported flattish at $1.44 billion, leverage ratios came in at 3.7 times EBITDA.
A $130 stock in August commanded a $3.1 billion equity valuation based on a share count of 24 million shares, for a $4.5 billion enterprise valuation, roughly the same as the valuation ahead of the Smiths deal. This made the Smiths deal the second troubled deal in a row, leaving shares to trade above 20 times adjusted earnings, while leverage is high.
Despite the shortfall, I did not want to be overly bearish, but shares did not look cheap enough yet, certainly given the questionable track record.
Another Shortfall
Since August shares have lost another one-third of their value, now trading at $86 per share after the third quarter results were utterly soft. Third quarter sales fell more than 7% to $553 million, as adjusted EBITDA was down 3% to less than $90 million.
The company posted adjusted earnings of $1.57 per share, down from an adjusted earnings number of $1.75 per share this period last year. Numerous adjustments were made between this number and a GAAP profit of $0.30 per share, and while I am happy to adjust for amortization and stock-based compensation charges, the GAAP earnings were positively distorted by a negative earn-out provision.
Net debt was reported flattish again at $1.44 billion, but given the dismal EBITDA number, there is continued pressure on leverage ratios. In fact, full-year adjusted EBITDA is seen towards the lower end of the $375-$405 million guidance, suggesting a leverage ratio of 4 times, or even a bit higher.
By now the market value of the firm has fallen to just $2 billion, valuing the entire business at $3.5 billion, as this valuation is basically at par with the valuation of the two latest acquisitions (although the first one is quite a while ago now), as a testament of the value being destroyed here.
The ICU Medical, Inc. business is largely infected by poor quality of the business acquired, quality issues, poor integration and debt. On the positive side, adjusted earnings remain intact, as managing this situation could unveil great appeal if the situation can stabilize and recover, but this is a big "if" here. Not willing to commit equity capital on the shares, long-dated upside calls might be of interest, provided that implied volatilities of the tails are somewhat modest.
For further details see:
ICU Medical: Who Is Coming To The Rescue?