2023-03-17 18:41:09 ET
Summary
- Masimo Corporation shares fell off a cliff early in 2022 amidst the pullback in momentum names and a poorly received deal for Sound.
- I like the long-term trajectory of the business and gave management the benefit of the doubt, believing it was an overreaction.
- Following a strong performance in 2023, I sit on 30% gains in a volatile market, making me very enticed to take profits in Masimo Corporation here.
A year ago, I wondered if the acquisition of Sound United by Masimo Corporation (MASI) was in fact sound. The company lost $5 billion in value in response to a billion dollar deal, marking a huge overreaction in my opinion, with investors believing that the strategic rationale was a bit thin.
Non-Invasive Medtech
Founded in 1989, Massimo has focused on the development, manufacturing and marketing of non-invasive monitoring technologies, recognized for quality and innovation.
The core product and expertise is measurement through motion and lower perfusion arterial blood oxygen saturation and pulse rate monitoring. This really is not hard to measure in a stable conditions, but when patients are on the move, traditional measurement practices yield unreliable results.
After its IPO in 2007 at $17, Masimo Corporation shares hit the $100 mark in 2017, to continue to rise to a high of $300 by the end of 2021. This share price performance was applied to a business which generated $1.2 billion in sales in 2021, with GAAP and non-GAAP earnings seen near $4 per share. The company held $11 per share in net cash, as it was easy to say that the valuations were very high. This was even the case as the company guided for 2022 sales to rise by around 10% to $1.35 billion, seeing earnings rise to around $4.30 per share.
Shares traded around the $300 mark around Christmas 2021, but fell to just $135 in March 2022, amidst the selloff in momentum names and the announcement of a deal. The company acquired Viper Holding, the owner of Sound United, in a $1.025 billion deal. Masimo itself trades at $211 per share pre this transaction announcement, valuing the business at $12 billion with 58 million shares outstanding.
Shares lost $80 upon the deal announcement, falling to $125 in the process, shedding $5 billion in value in response to a billion deal. Investors wondered if the consumer technology sound expertise was outside the core competency of Masimo, yet the company claims that both business can be integrated over time. The deal adds about a billion in sales and $125 million in EBITDA, so even on a standalone basis it is not necessary the case that Masimo made a terrible deal.
With 58 million shares down to $135, the equity value had fallen to $7.8 billion, for a pro forma enterprise valuation of around $8.1 billion. The EBITDA contribution of $125 million made a $5-6 earnings per share number perhaps reasonable, as leverage is modest and earnings multiples overnight have fallen to around 25 times.
This felt like a major overreaction here, and while Masimo Corporation management might be stretching the rationale a bit thin, I was happy to but the dip at $135 per share.
What A Year
As it turned out, Masimo Corporation shares had room to fall further in a tough stock market environment, with shares hitting a low of $110 in the summer, and as recently as December, followed by strong recovery to $175 here.
Masimo Corporation started 2022 with a modest 2% increase in first quarter sales to $304 million. Second quarter sales rose 85% to $565 million as a result of the Sound deal, as 17% growth in healthcare revenues to $357 million looks very decent, in fact impressive. Amidst all this, Masimo Corporation guided for sales around $2 billion, raising the midpoint of the earnings guidance to $4.45 per share (adjusted of course). The company did report a $700 million net debt load following the second quarter earnings report, on the back of an $401 million buyback program.
Following resilient third quarter results, the company posted fourth quarter results in February. For the year the company grew sales to $2.04 billion with healthcare revenues of $1.34 billion in line with the original guidance, up 8% on the year before, held back by about 2% as a result of the strong dollar.
The Sound deal contributed $617 million in sales, but this was of course as the deal only closed in Q2, with full year earnings posted at $4.59 per share. Amidst continued buybacks, net debt rose to $740 million, still a manageable amount given the profitability of the business and its underlying growth, with net leverage equal to about 2 times adjusted operating profits.
The 2023 guidance looks comforting in an uncertain economy. Full year sales are seen around $2.44 billion, with healthcare revenues seen up to around $1.46 billion, suggesting a solid mid- to high single digit increase in sales. Sound revenues are seen at a midpoint of $980 million, with full year adjusted earnings seen at a midpoint of $4.75 per share.
And Now?
The truth is that Masimo Corporation has done quite alright over the past year. The company delivered on the performance in the core business, as management bought back quite some stock on top of the Sound deal, as the company does not break out the profitability of both segments. While the Sound deal will add a great deal of sales, it has not moved earnings numbers a lot, suggesting that profitability here is an issue.
Give that the Sound deal is not delivering on the $1 per share accretion which I pegged a year ago, and Masimo Corporation shares have rallied some 30% since I initiated a position last year, in generally a tough market, I am very inclined to cash out of my MASI position here.
After all, Masimo Corporation has incurred some net debt, but moreover valuation multiples have expanded to an earnings multiple in the mid-30s, so I am reducing my position at these levels.
For further details see:
Masimo Corporation: Re-Rating Nearing Completion