Thursday, August 8, 2013

Masimo Reports 2Q Earnings; New Valuation Leads to Target Price Increase

Masimo Corporation (MASI) posted their 2Q13 earnings on July 31st, 2013 showing improvements on the Balance Sheet and strong figures on the Income Statement. Total Revenue for the quarter rose 11.9% to $137.4MM vs $122.8MM last year, beating out Street expectations of $136.4MM and narrowly missing our expectations of $141.9MM, mostly due to our higher anticipated revenue from their Rainbow products. Gross margin for the quarter expanded 10 basis points to 66.4%. Operating Income fell 160 basis points, mostly attributed to costs related to R&D and SG&A which grew overwhelmingly. Tax rates for the quarter skyrocketed to 36.2% vs 20.0% last year, due to the medical device excise tax, which began in the beginning of 2013, as well as a $2.0MM income tax provision for deferred tax assets of Cercacor, a separate company formed by Masimo in 1998. Net Income fell 12.3% to $17.0MM, or $0.30 per share on a non-GAAP basis, vs $19.4MM last year, or $0.30 per share. Masimo’s reported EPS beat Street expectations of $0.28 and was directly in-line with our expectations. 

On a geographical basis, all parts of the world that Masimo sells and distributes to are up; most notably in the Europe, Middle East and Africa region which saw a growth of 35.3%. The Asian and Australian market grew 9.7% and the Americas 8.5%. The Europe, Middle East and Africa region are expanding more rapidly because Masimo is continuing their efforts in investments of facilities and infrastructure in those key areas to help expand their operations in a more global scale. As a percentage of sales, these three geographical regions are now contributing nearly 280 basis points more than they did last year, accounting for 16.6% of all product revenue. 

On a segmented basis, product revenue, which breakdowns to worldwide direct products and Original Equipment Manufacturer (OEM) products, posted a 12.0% growth to $129.6MM over last year. Worldwide direct accounted for 83.0% of all total sales, and grew 10.0%. OEM Products, which accounted for the other 17.0% of revenue, grew 27.0%. Our main thesis of high growth in the Rainbow products still holds, as we saw a 19.0% increase to $11.5MM. The Rainbow line at Masimo is a monitoring device administered outside of the body to assess blood flow and physiological conditions, such as hemoglobin count, oxygen level & content, pulse rates & patterns, as well as various other measurements. The Rainbow product is in a class of its own, and as this unique product grows, we could see it expanding rapidly soon. 

To touch briefly on guidance, the future looks quite bright for Masimo. Rainbow products are expected to generate $50.0MM or more for the full year, with expectations of rapid growth towards the back half of the year. Mark P. de Raad, Chief Financial Officer at Masimo, states that the 19.0% growth we saw this quarter is expected for at least another couple of years, but expects a 40.0% supernatural growth in the later years as Rainbow begins to mature. Full year guidance of $548.0MM total revenue ($520.0MM product revenue; $28.0MM royalty revenue) and $1.14 EPS was not changed, and is still expected. 

Prior to releasing earnings after the market closed, Masimo ended the day at $23.29 a share. Stock price the next trading day quickly jumped, hitting a peak early in the day of $25.94, representing an 11.4% increase, before eventually cooling and ending the day at $24.75, or a gain of 6.3%. Masimo has since held steady, closing August 7th, 2013 at $24.92, a 7.0% gain since reporting. My original valuation of $26.11 has since been revaluated, leading me to increase my target price to $29.82. My Rainbow thesis still holds, and we expect a much more successful back half to 2013.

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