Summary
- Triple-digit growth in top-line sales for the quarter and the year evidence the market's approval for TransMedics Group, Inc.'s offerings.
- TransMedics Group is addressing operational efficiencies in its transportation network.
- I am now looking for another 40% upside potential to $112 in this name.
- Net-net, reiterate buy for TransMedics Group, Inc.
Investment Summary
TransMedics Group, Inc. ( TMDX ) has been a great call over the last 6–8 months since my original publication back in August. Since then, TMDX stock has repriced >100% to the upside and continues to leg higher.
Following the company's Q4 FY22' numbers last week , the stock has caught another strong bid as investors reward the triple-digit growth percentages across all operating divisions. In particular, I'd point out strengths in volumes of its heart and liver disposable sets and an equally strong march towards profitability. Moreover, it is addressing operational efficiencies through its transportation network to provide a better outlook with its air and ground logistics for the future. This, combined with its top-line performance in FY 2022, are remarkable features in the investment debate.
Net-net, I continue to rate TransMedics Group, Inc. a buy, looking to further growth in FY23', marking the CEO's words for investors to "expect demand to continue to grow throughout 2023 and beyond. And this is why we’re focusing on scaling our supply capacity."
TMDX Q4 Another Tremendous Growth Period
Getting straight to the numbers, it was another high-growth period for TransMedics Group, Inc., with top-line YoY growth of 225% to $31.4mm. Upsides were underscored by continued expansion of the company's national organ care system program ("NOP"), with 89% of revenue obtained from this segment. Even looking to the full-year results, revenues were up 209% YoY to $93.5mm, nearly triple the $30.2mm the year prior. Disaggregating this further, I'd note there are several points that need to be discussed to unpack the company's growth profile looking ahead:
- Looking to the divisional contribution, NOP cases drove ~97% of revenue for its organ care system ("OCS") liver disposables, ~80% of OCS heart disposables and around 85% of lung disposable sets . This wasn't achievable without expansion of the underlying transplant market, however. To that point, it was observed that markets for liver, heart and lung transplants each grew 300bps, 900bps and 700bps respectively in FY22', serving as a robust bedrock for the company to continue its own growth route. Hence, with the underlying market continuing to expand, TMDX is a major beneficiary of this, and its NOP is a key differentiator that looks to be getting strong adoption by providers in the market.
- Product revenues continued to dominate in Q4' and contributed ~80% to the top-line for the quarter, services making up the rest . This is important as well, because the product margin is higher, and doesn't incur the same efficiency headwinds that are discussed a bit later. I'd say this is important for TMDX to become profitable because it needs to maintain a high gross margin in order to see this flow vertically down the P&L.
- Geographically, most of TMDX's turnover was obtained domestically in the U.S. and grew >300% YoY and another 25% sequentially from Q3 FY22'. Again the bolus of turnover came from the liver segment, followed by heart and lung revenues respectively. Outside of the U.S. ("OUS"), the company actually booked a 500bps decline in turnover, attributed to an 11% FX headwind. Reconciling for this, OUS actually lifted 700bps YoY. Again, this demonstrates a high propensity for the company to continue expanding its international markets. Whilst most of the Q4 and FY22' upside was achieved from the U.S, OUS turnover will become integral in diversifying the distribution of revenues looking ahead.
Moving down the TransMedics Group, Inc. P&L, as expected, OpEx came in ~50% higher given the variable costs tied to business growth and with the company's reinvestment into future expansion of the company. Moreover, this was seen in gross margin compression of ~600bps YoY to 66%, as the firm had to increase inventory levels and meet its demand backlog by making its deliverables via charter flight – a primary result of the supply chain headwinds observed in global economies in FY22'. This could be a headwind for TransMedics Group, Inc. moving forward, and we'd need to see the company ramp up production and improve unit economics further in order to avoid absorbing this in its COGS margin looking ahead.
As I touched on just above, TransMedics Group, Inc. has increased its reinvestment into achieving this so that it can meet demand-pull in its NOP network. Nevertheless, triple-digit YoY revenue growth and equally strong gross profit on this with ~70% gross margin is an attractive proposition in the investment debate, by estimation.
Fig. (1)
Note: Each Period is shown as a rolling TTM basis. Hence, "Dec-22" represents the 12 months to December 31st, 2022, and so on. (Data: Author, using data from TMDX SEC Filings)
Fig. (2) TMDX FY22' U.S. Revenue Disaggregation – Observe the Substantial YoY delta
TransMedics Group Growth levers for FY 2023
The first point I'd raise here is that TransMedics Group, Inc. is forecasting another period of high growth for FY23'. It has projected 50–57% YoY growth at the top, calling for $145mm at the upper end of the range. Underlining this is further upsides in its OCS and NOP offerings that should be well-supported by the underlying trends in the transplant market, by estimation.
The question then turns to what levers TransMedics Group, Inc. will pull to get there. My analysis on this is as follows:
- First and foremost, it comes down to volumes and productivity. Specifically, I'd be looking to see TMDX grow its footprint within the U.S. transplant market because this is the company's major top-line growth driver in the mid-term. Chief to this, would be further expansion on its OCS and NOP programs, that were so instrumental in the company's performance last year.
- It then turns to the reinvestment and CapEx designated to build out the company's infrastructure to support this production and volume increase. Management did touch on this, noting it is building its staff headcount to facilitate more contact and ability to meet deliveries. It is also focused on potentially adding more launch points to supplement this so that it has more regional contact.
- Most importantly, however, TransMedics Group, Inc. needs to overcome the charter flight issues it faced in FY22' – namely, that this is too expensive and unsustainable for margin growth down the P&L. To this point, management noted it is heavily prioritizing its buildout of air and ground logistics, in order to cap logistics costs. If it can do this, it is my opinion that TransMedics Group, Inc. can maintain the high gross margin as outlined earlier in this report. For it to achieve profitability in a reasonable time frame, this is a key factor for contention by the best estimation.
Conversion on these 3 tension points are integral as the growth levers for FY23'. In particular, the focus on addressing transport network and costs is positively welcomed. Given the company's execution to date, I am confident it can achieve this, adding a heavily bullish weight to the risk/reward calculus.
Valuation and conclusion
TransMedics Group, Inc. completely blew my FY22' revenue estimates out of the water. It has easily met the $77 price target given in the last publication. Further, TMDX trades at 25x sales, but given it is on a major ramp-up in sales, I'd be comfortable in paying this. Looking to the FY23' revenue estimates of $145mm at this multiple derives a price target of $112.50 – a figure that is completely in the realms for TMDX in best estimation. Hence, I am not looking for another 40% upside in TransMedics Group, Inc.
Net-net, there's more than enough evidence to reiterate that TransMedics Group, Inc. is a buy right now. Fundamentals continue improving, and management is set on addressing the inefficiencies observed throughout the last 12 months. This can potentially drive margins higher, and maintain the consistent uptick in revenues looking ahead. As such, I re-rate TransMedics Group, Inc. as a buy at $112.
For further details see:
TransMedics: Triple-Digit Revenue Growth Supports Repricing In FY 2023