2023-10-26 02:06:39 ET
Summary
- Inari Medical has shown strong revenue growth and achieved its first profitable quarter since 2021, making it an attractive investment option.
- The company targets a largely untapped $6 billion VTE market, offering significant room for growth with its innovative product lines and clinical trials.
- Recent insider trading activities should be considered as a cautionary signal, but overall, Inari Medical has the potential for less risk and more profitability.
Investment Thesis
Inari Medical ( NARI ) presents a compelling case for investors with a risk appetite, demonstrated by its strong revenue growth, a 28% YoY increase, and its first profitable quarter since 2021. The company targets a vastly underpenetrated $6 billion VTE market, offering significant room for growth. Innovations in new product lines, robust clinical trials, and a substantial cash cushion of $337.5 million make the company an attractive investment option. However, the recent insider trading activities warrant some caution.
The earnings forecast for Q3 2023 adds optimism, projecting a 4.49% revenue growth and a positive EPS turnaround. On the valuation front, the stock appears fairly priced between $57.05 and $62.48 per share, considering both historical and projected revenue multiples.
With its current stock price at $57.45, Inari Medical offers modest upside potential of up to 8.8%. Given these facts and figures, the investment recommendation for Inari Medical at this point would be a "Hold".
Overview
Inari Medical reported revenue of $119 million, which is a 28% increase Year-over-Year (YoY) . Further, the company has cut down their operating loss to $1.5 million and is reporting positive net income for the first time since 2021. These numbers indicate business health and profitability.
The company is focusing on innovation with new product lines like REVCORE and T16 Curve. These products address unmet needs, such as venous stent thrombosis. The launch of these products is a strategic business move that opens up new avenues for revenue. Importantly, this innovation is backed by clinical trials, like the FLAME study, further fortifying Inari's credibility and potential for market adoption.
Speaking of the market, the industry outlook is favorable, especially for Inari. The VTE (Venous Thromboembolism) market, which Inari is targeting, is valued at $6 billion but is only 6% penetrated. This gap represents a massive opportunity for market capture. Their product line, which treats both acute and chronic clots, places them ahead of potential competitors. The company is confident that its team and product pipeline can outperform any new entrants in this market space.
However, it's crucial to consider recent insider trading activity. William Hoffman, a director at Inari, recently sold 25,000 shares worth about $1.4 million, as disclosed in an SEC filing. This sale was part of a Rule 10b5-1 trading plan and is one of 11 total insider trades in the past three months. During this period, there have been zero open market buys but 11 seller trades, involving the sale of about 680,664 shares. This level of insider selling could be interpreted as a cautionary signal and should be factored into investment decisions.
Looking forward, Inari is focusing on U.S. expansion through new hires and deeper market penetration. This is a calculated strategy to broaden their reach and create more touchpoints for sales and customer engagement. This domestic growth is coupled with an eye on international markets, especially Europe, which could contribute to the company's revenue streams in the near future.
However, there are inherent risks to consider. Regulatory changes, especially in international markets like Europe, can be a hurdle. Market adoption rates for new products are never a given and will need to be closely monitored. Furthermore, while the VTE market is currently underpenetrated, it's also under-competitive, but that could change as the market grows, bringing in new players.
Financially, the company sits on a cash and investment cushion of $337.5 million as of the end of Q2. This financial stability provides a safety net for future R&D and cushions against market volatility, thereby reducing investment risk.
Overall, Inari Medical's strong financials, focus on R&D, and strategic market positioning, coupled with a favorable industry outlook and forward-thinking expansion plans, make them a potentially less risky and more profitable investment option.
Financial Analysis
In Q2 2023, Inari Medical generated revenue of $119.005 million, up 28.3% from $92.744 million in Q2 2022. The revenue for H1 2023 was $235.172 million, a 31% increase from H1 2022's $179.496 million. COGS increased to $13.844 million in Q2 2023 from $10.347 million in Q2 2022, a 33.8% growth, which is a faster growth rate than revenue, signaling a potential risk. Gross Profit for Q2 2023 was $105.161 million, up 27.7% from $82.397 million in Q2 2022.
Research and Development expenses rose by 13.5% from $18.569 million in Q2 2022 to $21.085 million in Q2 2023, while Selling, General, and Administrative expenses increased by 17% from $73.156 million to $85.586 million. Loss from Operations decreased by 83.8% from $9.328 million in Q2 2022 to $1.510 million in Q2 2023, and Net Income was $2.085 million, reversing a loss of $10.187 million in Q2 2022.
Revenue concentration revealed that 34% comes from ClotTriever systems (up from 33%) and 66% from FlowTriever systems (down from 67%), indicating a high dependency on FlowTriever systems, which could be risky if that market faces challenges.
In trend analysis, the Gross Profit Margin slightly declined from 89.1% to 88.4%, potentially due to the faster growth rate in COGS compared to revenue. The Operating Expense to Revenue ratio improved from 99% to 89.6%, indicating better cost management. The Operating Margin also improved from -10.1% to -1.3%, signaling operational efficiency.
For forward-looking analysis, if the company maintains the current 28.3% YoY growth for Q2 and 31% for H1, and if COGS and operating expenses grow at their current rates, the company could potentially achieve an annual revenue of approximately $480 million and reach profitability by year-end, given the downward trend in operational losses.
Key risks include the faster growth rate of COGS compared to revenue, existing operational losses, and high revenue concentration in FlowTriever systems. With $8.678 million in other income and a positive net income of $2.085 million, the financial health appears to be stronger than last year.
Balance Sheet Analysis
The company’s current assets have grown by 5.1%, increasing from $422.905 million in December 2022 to $444.617 million in June 2023. This uptick suggests that the company may be gearing up for more business activities and is strategically accumulating assets, especially inventories, which have surged by a significant 19.6%. However, this might raise a red flag if the increase doesn't align with sales expectations, indicating potential overstocking issues. The cash and cash equivalents have contracted by 4%, dropping from $60.222 million to $57.837 million. This decline might indicate increased investments and debt repayments but could also signify a liquidity issue if sustained over the long term. Short-term investments have seen a 5% increase, growing from $266.179 million to $279.696 million, suggesting a proactive investment strategy for better returns. Accounts receivable has also risen by 7.7%, hinting at potentially higher future income but also longer collection periods, which could be a concern.
On the liabilities front, current liabilities have increased by 3.7%, from $56.174 million to $58.238 million. Interestingly, accounts payable within these liabilities have decreased by 5.5%, indicating a paydown of trade credit but potentially higher short-term debts or accruals. Non-current liabilities saw a 0.4% increase, making it relatively flat. The Debt to Equity ratio stands at 0.205, a slight increase from the previous period, suggesting a minimal uptick in financial leverage.
The current ratio improved from 7.53 to 7.63. This indicates that the company is in a strong liquidity position. However, the 4% decline in cash reserves, coupled with a 19.6% surge in inventories, could be potential risk areas that require close monitoring. If we consider the current trajectory of increasing assets and only a slight bump in liabilities, forward-looking analysis suggests the company is well-positioned for growth. Yet, the reduced cash position needs to be carefully watched as it may hamper operational flexibility.
In a SWOT context, strengths lie in high liquidity and low leverage, weaknesses manifest in decreased cash and a surge in inventories, opportunities exist in increased accounts receivable and short-term investments, and threats emerge from the uptick in current liabilities and cash reduction.
Free Cash Flow Analysis
In 2019, the Net working capital (NWC) stood at $21 million, which rose by 90.5% to $40 million in 2020, and further increased by 25% to $50 million in 2021. This consistent growth in NWC is a good sign, implying that the company can meet its short-term obligations and has room for operational investment.
The EBIT was $25 million in 2019 but plummeted by 120% to -$5 million in 2020, and further deteriorated by 360% from its 2019 level to -$23 million in 2021. This negative EBIT for two consecutive years signals operational inefficiencies. The NOPAT was $21 million in 2019 and declined by 119% to -$4 million in 2020 and dropped even further to -$19 million in 2021, marking a 190.5% decline from its 2019 level. The consistently negative NOPAT figures indicate profitability concerns.
In 2019, Unlevered Free cash flows (UFCF) was $6 million but nosedived by 633% to -$32 million in 2020 and remained at a similar level in 2021. Levered free cash flows (LFCF) was $10 million in 2019, dropped by 260% to -$16 million in 2020, and flatlined at $0 in 2021. These negative cash flows for two years indicate liquidity issues and hinder the company's growth and investment opportunities. While revenue growth increased from $208 million in 2019 to $336 million in 2020 (a 61.5% growth) and further to $439 million in 2021 (a 30.7% growth)—this has to be weighed against troubling profitability metrics.
In terms of forward-looking analysis, if NWC continues to grow at a similar rate, say a conservative 20%, it could reach around $60 million by the end of 2022. However, unless operational efficiencies are implemented, the UFCF and LFCF are likely to remain negative. Immediate action is needed to turn around the negative profitability metrics, and failing to do so will only deepen the financial risks. The negative EBIT and NOPAT signify potential inefficiencies that need to be addressed. There's also a disproportionate growth in NWC compared to UFCF and LFCF, indicating that the quality of NWC growth could be questionable. Another external risk could be market saturation and competition, affecting sales and consequently, both working capital and cash flows.
In conclusion, despite promising revenue and NWC numbers, the negative EBIT, NOPAT, UFCF, and LFCF figures indicate serious operational and financial challenges.
Shareholder Yield
With a dividend yield of 0.00%, the company isn't paying out any common dividends; this is a concern for those who are income-focused investors. The buyback yield is 0.29%, indicating that the company isn't aggressively repurchasing its shares. The net payout yield, which is the sum of the dividend yield and buyback yield, is at 0.29%, raising a concern for investors seeking either income or capital appreciation. The negative debt paydown yield is -0.12%, which indicates an increase in the company's debt levels. If this pattern persists, the company could face greater constraints on its balance sheet and less financial agility, possibly leading to diminished ROI for shareholders in the short term.
The shareholder yield, a composite metric of the dividend, buyback, and debt paydown yields, is at 0.17% and, when combined with rising debt, possibly further depress this yield and negatively impact the stock price. The red flags include the company's increasing debt, as marked by the negative debt paydown yield, which will increase interest payments and could cut into profitability and cash flow. Moreover, the low net payout and shareholder yields, in conjunction with the rising debt, could create liquidity risks. The company may struggle to meet its short-term obligations if it isn't generating enough cash flow while taking on more debt. The company could be resorting to debt financing for its operations instead of generating sufficient cash flows, a strategy that isn't sustainable in the long term.
In summary, the company appears to be on a precarious path, increasing its debt as marked by a negative debt paydown yield and offering meager returns to its shareholders through low net payout and shareholder yields.
Earnings Forecast For Q3 2023
Inari Medicals is expected to experience a moderate but positive uptick in both revenue and EPS from June 2023 to September 2023. Specifically, the average revenue forecast grows from $116.724 million in June to $121.965 million in September, marking a 4.49% increase. This suggests a stable financial trajectory over the three-month period. Simultaneously, the average EPS forecast shows a turnaround, moving from a negative $-0.12 in June to a positive $0.0063 in September. This change in EPS could indicate a significant improvement in the company's operational efficiency. Given these projected improvements in both revenue and EPS, Inari Medicals appears to be on a positive financial path.
Valuation
The EV/Revenue (Enterprise Value to Revenue) multiple is a right metric for valuing Inari Medicals for several reasons. First, this ratio is less influenced by accounting decisions and provides a straightforward measure of a company's worth. It's particularly useful for Inari Medicals, which has shown rapid 3Y CAGR revenue growth of 95.7% and latest twelve-month (LTM) growth of 30.8%. The ratio helps investors gauge whether the market is valuing this rapid growth appropriately.
Benchmark Companies
The benchmarks chosen for this analysis are Nevro Corp., Orthofix Medical Inc., Pro-Dex, Inc., Boston Scientific Corporation, and Merit Medical Systems, Inc. These companies operate in the medical device sector, similar to Inari. That ensures a sector-specific comparison, which is crucial for drawing accurate conclusions. The benchmarks also exhibit a varied mix of revenue growth rates and profit margins, ranging from low to high. This variety enables a more balanced view when comparing Inari to these companies. For instance, Nevro Corp's latest twelve months (LTM) revenue growth stands at 8.1%, which provides a contrast to Inari's much higher 30.8%.
Select LTM Revenue Multiple Analysis
Inari's current EV/LTM Revenue multiple is 6.91x. This is higher than the average of the selected benchmarks, which range from 0.81x to 6.26x. This could indicate that the market values Inari's revenue streams quite highly, likely because of its impressive revenue growth of 30.8% over the latest twelve months. When we apply selected multiples of 6.65x, 7.00x, and 7.35x to Inari's LTM revenue, we get an implied Enterprise Value (EV) ranging from $2,920 million to $3,228 million. After subtracting non-shareholder claims of $314 million, the implied equity value is between $3,234 million and $3,541 million. This translates to an implied stock price range of $56.39 to $61.75 per share, considering there are 57.4 million shares outstanding.
Select Projected Revenue Multiple Analysis
Inari Medicals is projected to have a 5 Year Forward CAGR (Compound Annual Growth Rate) of 17.3%, which is high compared to its peers. This high growth rate justifies a higher valuation multiple. The selected projected revenue multiples range from 5.23x to 5.78x, taking into account this future growth. Based on these multiples, Inari's implied Enterprise Value ranges from $2,996 million to $3,312 million. Subtracting the non-shareholder claims results in an implied equity value between $3,310 million and $3,626 million. This gives us an implied stock price range of $57.72 to $63.22 per share.
Fair Value Range
By combining the valuation ranges obtained through both LTM and projected revenue multiples, a comprehensive fair value range falls between $57.05 and $62.48 per share. Given that the stock is currently trading at $57.45, the valuation suggests a potential downside of -0.7% and an upside of 8.8%.
Conclusion: Hold Decision
The stock of Inari Medicals is currently trading at $57.45. Based on the valuation ranges obtained through both the Last Twelve Months (LTM) and projected revenue multiples, the stock's fair value falls between $57.05 and $62.48 per share. This implies that at its current market price, the stock is fairly valued with a modest upside potential.
One of the strongest arguments for holding Inari Medicals is its strong historical and projected revenue growth. The company has a 3-year CAGR of 95.7% and an LTM revenue growth rate of 30.8%. This is significantly higher compared to the selected benchmark companies. Its projected 5-year CAGR of 17.3% further strengthens the case. These growth rates indicate that Inari has solid future revenue prospects, justifying its current valuation multiples.
While the company does have negative EBIT (Earnings Before Interest and Taxes) margins, it's essential to consider this in the context of its high growth. High-growth companies often reinvest heavily into their businesses, which can result in short-term negative profitability but is generally a strategy aimed at long-term gains.
Inari Medicals operates in the medical devices sector, a sector known for high valuations due to the essential nature of its products and services, and often, the high barriers to entry. Therefore, a higher multiple is often justified for companies in this sector that show strong growth, like Inari.
With the current stock price at $57.45, the company's shares are near the lower end of this range. This suggests that the stock is not overvalued at the moment, making it a safer bet for investors who are considering getting in.
However, it's also essential to consider the risk factors. The stock's valuation is rich, and any misstep in executing its growth strategy or a general market downturn could hit the stock hard. Therefore, for an investor who is risk-averse, holding and monitoring the stock's performance would be more prudent than buying at this stage.
For further details see:
Inari Medical: A Balanced Opportunity Amid Risks