Symmetry Medical, Inc.

Transcription

1 November 28, 2014 Symmetry Medical, Inc. Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Outperform Date of Last Change 11/28/2014 Current Price (11/27/14) $9.11 Target Price $ Week High $ Week Low $7.87 One-Year Return (%) Beta 0.83 Average Daily Volume (sh) 320,622 Shares Outstanding (mil) 38 Market Capitalization ($mil) $342 Short Interest Ratio (days) 2.34 Institutional Ownership (%) 92 Insider Ownership (%) 4 Annual Cash Dividend $0.00 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 3.7 Earnings Per Share (%) -6.4 Dividend (%) N/A using TTM EPS 20.7 using 2014 Estimate 18.2 using 2015 Estimate 14.0 Zacks Rank *: Short Term 1 3 months outlook * Definition / Disclosure on last page 3 - Hold SUMMARY Risk Level * Type of Stock (SMA-NYSE) Symmetry Medical reported dismal third-quarter 2014 results with both revenues and earnings missing the Zacks Consensus Estimate. Revenue growth was negatively impacted by weak surgical revenues while improved cost efficiency positively impacted profits. We believe that the divestiture of the company s underperforming OEM solutions business is a positive as it will help management focus on its relatively fast growing and higher margin surgical business. Nevertheless, we believe that sluggish hospital spending environment will pose a headwind to top-line growth over the next several quarters. Moreover, the surgical market is significantly fragmented. Also, heightened competition will compel Symmetry Medical to spend on new product development that will hurt margins, at least in the near term. Given the headwinds, we downgrade our recommendation from Outperform to Neutral and set a price target of $9.50. Below Avg., Small-Value Industry Med Products Zacks Industry Rank * 84 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) A 102 A 101 A 107 A 411 A A 102 A 98 A 101 A 400 A A 101 A 96 A 97 E 395 E E 102 E 97 E 108 E 404 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.07 A $0.12 A $0.16 A $0.15 A $0.50 A 2013 $0.04 A $0.10 A $0.07 A $0.08 A $0.29 A 2014 $0.08 A $0.15 A $0.13 A $0.14 E $0.50 E 2015 $0.15 E $0.16 E $0.14 E $0.20 E $0.65 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved S. Riverside Plaza, Chicago IL 60606

2 OVERVIEW Headquartered in Warsaw, IN, Symmetry Medical, Inc. (SMA) provides surgical instruments, orthopedic implants and sterilization cases and trays. The company operates in two reportable segments: (1) Original Equipment Manufacturer (OEM) Solutions and (2) Symmetry Surgical. Through its OEM business (79.2% of revenues at the end of the first nine months of 2014) Symmetry Medical offers instruments, implants and sterilization cases and trays to OEM customers. In Aug 2014, the company announced the sale of the OEM business to Tecomet for $450 million in cash or $7.50 per share after fees and elimination of outstanding debt. Under the terms of the agreement, Symmetry Medical will transfer its remaining Symmetry Surgical business to its shareholders in a newly traded standalone public company. Shareholders will receive one share in the new company for every four Symmetry Medical shares held. The company expects the transaction to be completed by the end of Surgical business segment (20.8% of revenues at the end of the first nine months of 2014), headquartered in Nashville, Tennessee, was created in The segment developed from integration of the acquired Codman surgical instruments and Olsen Medical lines with the company s already existing hospital direct business, Specialty Surgical Instrumentation (SSI). Symmetry Surgical offers a broad range of reusable stainless steel and titanium surgical hand-held instruments and retractor systems, sterile disposable surgical products (vein strippers, SECTO dissectors, tonsil sponges and surgical marker pens), and sterilization containers. These products are typically used in the surgical specialties of spine, general/obstetrics/gynecology, microsurgery/neurosurgery, orthopedics, laparoscopy, cardiovascular, thoracic and general surgery in the hospital setting as well as surgery centers and in select physician offices. Symmetry Medical reported revenues of $399.9 million in In the nine-month period ended Sep 27, 2014, revenues increased 1.2% year over year to $294.1 million. Notably, United States accounted for 72.7% of the revenues. REASONS TO BUY The divestiture of the OEM solutions business is expected to enhance the growth potential of Symmetry Surgical, apart from providing liquidity to shareholders. Much like the sale of U.K.-based subsidiary, Clamonta Ltd., the OEM divestiture will help the company focus on high-margin surgical business. Meanwhile, lower manufacturing footprint will drive profits. According to management, the stand-alone company will be able to target a broader surgical instrument market, which will drive sales. Symmetry Surgical is estimated to have an approximate 8 9% share of the re-usable surgical instruments market, which is currently worth almost $1 billion. However, this is only a minuscule part of the general surgery devices segment, which is estimated to value $18 billion. Hence, we believe that the new stand-alone entity has immense potential to penetrate this growing market banking on its strong product portfolio and nimble structure over the long term. Symmetry Medical has created a distinct competitive position in the orthopedic device market with its Total Solutions approach. Through Total Solutions, customers are provided with a broad range of products related to orthopedic implants, as well as comprehensive services and production capabilities to bring these implant systems from the drawing board design stage to commercialization in a timely and cost efficient manner. Most of Symmetry s customers expand outsourcing, to realize Equity Research SMA Page 2

3 the benefits of a one-stop shop solution that allows them to focus their efforts on marketing and research and development (R&D). Total Solutions will not only provide the company with growth opportunities but will also increase the relative percentage of value-added products offered to customers. Symmetry Medical continues to introduce new products, which are likely to boost its top line. The company is aggressively spending capital to support new product launches. Symmetry Medical has also diversified its offerings into areas outside of orthopedics like dental, osteobiologic, and endoscopy. As a stand-alone company, Symmetry Surgical is expected to foray into other surgical device markets like Minimally Invasive Surgical segment, Neuro, Robotics, Aesthetics, Uro-Gyno, Audiology, Ortho, and Ophthalmology, which will further drive growth. Symmetry Medical s cash and debt positions have improved. The company exited the third quarter with cash and cash equivalents of $27.2 million, which highlighted a significant improvement from $7.4 million reported at the end of The figure also compares favorably with $17.3 million reported at the end of the previous quarter. Long-term debt stood at $170 million, which remained flat with the previous quarter figure. Net cash from operating activities also improved in the last nine months. The sale of the OEM business will further improve liquidity, which is another positive in our view. REASONS TO SELL The divestiture of Clamonta will likely hurt Symmetry Medical s revenues in Moreover, the new Symmetry Surgical business is facing significant challenges due to persistently sluggish hospital spending. Symmetry Medical faces pricing pressure in the orthopedic market and concerns over depressed pricing in certain markets add to its woes. In the surgical market, the company faces intense competition from the likes of B Braun, CareFusion, Integra Life Sciences, Storz and numerous product divisions of capital equipment companies, which is a major concern for the stand-alone surgical business over the long term. Symmetry Medical is exposed to customer concentration risks. In the nine months of 2014, two customers accounted for approximately 30.5% and 12.2%, respectively, of revenues. Symmetry Medical s largest customer (DePuy) accounted for 29.5% of third-quarter revenues. Loss of any of these customers will considerably hurt top-line growth going forward. Symmetry Medical s significant international presence helps to widen its customer base. However, fluctuations in currency exchange rates can adversely impact the company s international sales. Equity Research SMA Page 3

4 RECENT NEWS Third Quarter Highlights Symmetry Medical reported adjusted earnings of $0.11 per share in the third quarter of 2014, which missed the Zacks Consensus Estimates of $0.14. However, earnings per share (EPS) improved from $0.08 reported in the year-ago quarter. Quarter Details Revenues remained almost flat from the year-ago quarter to $96 million, which lagged the Zack Consensus Estimate of $97 million. The OEM Solutions segment s revenues totaled $76 million, up 3.3% from the year-ago quarter. Higher revenues from the Instruments (up 4.4%), Implants (up 3.9%) and Other (up 29.1%) segments drove the growth, which was partially marred by a drop in Cases segment revenues (down 4.1%). OEM customers spent relatively less on Instruments and Cases in the quarter. The Symmetry Surgical segment revenues grossed $20.0 million, down 9.8% from the year-ago quarter. The decline can be mainly attributed to lower amount of spending in hospitals. Revenue growth was also negatively impacted by loss of distribution rights of the New Wave surgical product line, which was acquired by Covidien. Symmetry Medical s largest customer accounted for 29.5% of third-quarter revenues. Gross margin expanded 40 basis points (bps) on a year-over-year basis to 26.8%. The gross margin expansion was primarily driven by cost efficiency initiatives. Sales and marketing expenses was $6.3 million, down 3.1% from the year-ago quarter. However, general and administrative expenses increased 26.8% year over year to $14.9 million. Adjusted operating margin contracted 130 basis points on a year-over-year basis to 8.5%, due to higher costs and a lower revenue base. Financial Position Cash and cash equivalents at the end of third quarter was $27.2 million. Equity Research SMA Page 4

5 VALUATION Symmetry Medical shares are currently trading at 20.7X TTM earnings, a discount to the peer group average of 46.3X but at a premium as compared with S&P 500 average of 19.0X. The stock is trading below the mid-point of the historical range of 11.1X to 39.2X TTM earnings. Thus, a chance of upside from the current level is possible. The stock is trading at 18.2X, a 28.3% discount based on our 2014 forward estimates, lower than the average discount of 41.3% historically, which indicates possibility of downward movement. Moreover, Symmetry Medical s 5 year estimated EPS growth rate of 9% is much worse than the peer group average. Given the negative signals, we downgrade our recommendation from Outperform to Neutral and set a target price of $9.50 (19X 2014 EPS). Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Symmetry Medical, Inc. (SMA) Industry Average S&P NuVasive, Inc. (NUVA) Haemonetics Corporation (HAE) Orthofix International N.V. (OFIX) N/A ICU Medical, Inc. (ICUI) TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow Symmetry Medical, Inc. (SMA) P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Industry Average S&P N/A 2.0 N/A Equity Research SMA Page 5

6 Earnings Surprise and Estimate Revision History Equity Research SMA Page 6

7 DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of SMA. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1136 companies covered: Outperform %, Neutral %, Underperform 6.4%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Analyst Lead Analyst QCA Reason for Update Aniruddha Ganguly Aniruddha Ganguly Aniruddha Ganguly Earnings Equity Research SMA Page 7