Summary
- Inari Medical has solid top-line growth with expansion in core and new product lines.
- It continues to focus on reinvestment into future growth, especially in international markets.
- Operating losses are widening as a result of this.
- Net-net, I reiterate my buy rating.
Investment Summary
Inari Medical, Inc. ( NARI ) posted its Q4 and FY22 results on Monday after the bell, and the numbers indicated a substantial investment into future growth and a focus on expanding its international markets. Back in November, I released a publication on NARI titled " No change to targets despite flat price action " and since then the stock has been sold off with a 20% correction to the downside. Alas, this hasn't changed my long-term view on the stock, and the earnings posted on Monday are constructive on this posture. As a reminder, I've looked to NARI as a long-term holding for a number of reasons, including:
- Top-line sales and gross profit growth over the past 3 years to date.
- Profitability trends "are on our side and have been growing throughout the pandemic".
- Growing number of territories under its belt, resulting in smaller individual territory sizes as its salesforce grows. This is intended to drive revenue per rep higher.
- Consistently revised FY22 sales guidance.
- Respectable upside targets on valuation.
- Strong reinvestment into future growth at reasonable rates of return.
As I pour through the company's 10-K performing my own analysis on the numbers and listen to language from management on the earnings call , I've retained this stance and see NARI converting on its strategic growth initiatives this year. Net-net, I reiterate NARI as a buy on long-term value but would emphasize that the coming 2-3 quarters are absolutely essential for investors to observe in order to gauge the company's success in executing its new growth strategy. I rate the stock a buy.
NARI Q4, FY22 Earnings Analytics
It was a commendable quarter and 12 months for NARI on a number of fronts, including updates on the limited market release of its Artix system. Following this market trial, the company has the scope to innovate around the product further and make additional improvements for another market release in FY24. I'd encourage investors to stay focused on this in the coming periods. To this point, the company's pipeline is filled to the brim, and it looks like there will be a number of conversions from the pipeline this year - another key inflection point that must be considered in my estimation.
Looking at the numbers, there's a good bunch of data to unpack here. Starting with the Q4 results, NARI pulled in revenues of ~$108mm, a 30% YoY growth schedule that came in ahead of the previous quarter as well. As expected, with the expansion of its FlowTriever portfolio (additional products for the toolkit) gross margin saw ~220bps of compression to 87.8% in addition to a 54% YoY increase in inventory value to support the revenue growth. Moving down the P&L, it booked an operating loss of $5.7mm with an R&D investment of $20.4mm. However, I would treat this R&D as an investment into future growth, and subsequently capitalize it on the balance sheet as an intangible, with a 10% amortization schedule. Reconciling for this, the company recognized operating income of $12.7mm. It also lost ~46% of leverage at the SG&A line from last year, but again, the bulk of investment came from an investment into human capital. Alas, whilst it is treated as an expense under GAAP accounting rules, the main point to get across is that the increase in OpEx is arguably tied to an investment into future growth. It pulled this down to a loss of $0.11 per share.
The Q4 results provide adequate context for the firm's FY22 numbers and are an appropriate segue into the full-year analysis. Top-line sales for the year were up 38% YoY to $383.5mm, underscored by growth in its U.S. base, but ~200% is attributed to NARI growing its international markets. Chief to the upside was the investment into its sales force (discussed later) but also reflected the addition of new accounts and growth of its existing ones. Looking at the divisional highlights, my analysis is as follows:
- Revenue skew is tilted towards the FlowTriever portfolio, with 68% or $260.8mm of turnover derived from this segment.
- However, it's important to note the remainder of its portfolio, mainly ClotTriever, captured an additional 2 percentage points of overall revenue growth. To illustrate, it was only 30% of sales in FY21 and grew to 32% of sales last year.
- This is important to emphasize, because it exhibits NARI's ability to expand new product lines whilst maintaining a steady line of growth in its legacy portfolio. Moreover, the FY22 gross margin of 88.4% was down YoY as expected, but is still well above peers. If it can hold this level of gross margin into the future, there's a good chance it will feed high amounts of income down the P&L to the bottom-line.
Fig. (1)
Speaking of the FY22 P&L, the company booked a $28.1mm operating loss. But again, it boils down to a $74.22mm R&D investment and 53% YoY increase at the SG&A line, tied to investment into human capital. A few points to note here from my observations:
- Again, I'd capitalize the R&D spend as an investment onto the balance sheet (with 10% amortization) to arrive at an adj. operating income of $46.12mm.
- In saying that, NARI is investing heavily into its future growth, particularly into growing its international markets, as mentioned earlier. For example, it is now operating in >20 global markets, including Australia, New Zealand, Chile, just to name a few. Management noted that ~50% of the operating loss stemmed from its investment in growing the international footprint, even though it only accounted for ~2% of sales. Nevertheless, the effect of diverting this capital towards expanding its international footprint to both operating income and CFFO is seen in Figure 2, contrasting with the stellar revenue ramp exhibited since FY20.
- Further, the company has consistently been expanding its sales rep headcount over numerous periods now. It finished the year with 280 territories, 5 more than my last coverage. The benefit of increasing the number of territories is that each territory becomes smaller, resulting in less coverage for each rep. The good news is that NARI expects to wind back on the pace of hiring for now, which should flow positively through to the operating line looking ahead. That said, it looks to have 310 territories under its belt by the end of this year.
Fig. (2) Note the stellar revenue ramp and divergence to CFFO and operating income as NARI diverts capital into growing its international markets
Valuation and Conclusion
The stock is trading at 7x EV/sales, and this is a substantial premium to the industry. The question is, what do we expect when paying this kind of multiple? I'd look to it as an expectation the company will expand top-line growth by ~7x over one's long-term investment horizon. If it were 10 years, say, we're looking to $3Bn in revenues at 7x FY22 sales, and this calls for a CAGR of 25% per year over that time. A shorter timeframe of 5 years would call for roughly double that percentage - but it doesn't have to be linear. My estimate is that NARI can get there at some point over the coming 5-10 years given the stellar revenue ramp shown in Figure 2, and the forward revenue projections of 25% in FY23 give a good springboard to start the process. Further, given its investment into growing international markets, I believe this will become a major contributor to top-line growth into the future if it converts - remember, at this stage, it is just 2% of sales. Hence, it can be justified to pay 7x sales for NARI on this rational, in my view. Aside from that, NARI is rated in the top grade of growth using the quant ratings system in support of this. Further, I've got upside targets to $64 on my point and figure studies looking at a 1x2 box reversal, calling for 14% upside potential from the current market price. Being a daily time frame, it also looks to the coming weeks.
Fig. (3) NARI Quant factor grading - highest grade for growth
Fig. (4) Upside targets forming to $64
Net-net, there's good fundamental data to suggest NARI is strategically working towards growing its enterprise both domestically and on a global scale. The heavy investment into growing its international markets is something I am constructive on, and I believe it can ramp up the company's top-line if it converts successfully here. The coming 2-3 quarters of operations will be integral to understanding how the company is executing on this. In lieu of that, I reiterate NARI a buy.
For further details see:
Inari Medical: Reinvesting Heavily Into Growing International Markets