NuVasive Tops Earnings Expectations, but Challenges Remain

NuVasive (NASDAQ: NUVA  ) , a maker of minimally invasive surgical products and biologics for spinal surgery, reported its first-quarter earnings on April 29.

NuVasive reported non-GAAP earnings of $14.3 million, or $0.29 per share, topping the Thomson Reuters consensus estimate of $0.23 per share. On a GAAP-adjusted basis, it posted a loss of $0.40 per share due to litigation expenses. NuVasive's revenue climbed 11% to $177.5 million, also topping the consensus estimate of $171.3 million.

Looking ahead to the full year, NuVasive expects non-GAAP earnings of $1.06 per share on revenue of $725 million, which misses analysts' expectations of $1.08 per share on revenue of $727.8 million. Yet shares of NuVasive, which have already rallied more than 65% over the past 12 months, still climbed 3% after the earnings announcement.

Does NuVasive still have room to run, or are its much larger rivals -- Stryker (NYSE: SYK  ) , Zimmer Holdings (NYSE: ZMH  ) , and Medtronic (NYSE: MDT  ) -- better investments?

How NuVasive is different from its rivals
At first glance, NuVasive looks comparable to Stryker, Zimmer, and Medtronic since they all sell spinal care products. Medtronic controls 36% of that market, followed by Johnson & Johnson's (NYSE: JNJ  ) 26% share, and Stryker's 9% share. NuVasive and Zimmer, respectively, control 5% and 3% of the market.

But while other companies mainly sell a wider variety of spinal products, NuVasive's business centers around a minimally invasive platform known as MAS (Maximum Access Surgery). MAS allows procedures such as a lateral entry approach known as XLIF -- which accesses the patient's spine through the side -- to be performed.

XLIF offers several key advantages over traditional procedures. The XLIF procedure takes as little as one hour to complete, compared to up to five hours for a traditional one. XLIF patients can typically recover within six weeks, compared to six months for traditional methods. As a result, post-operative pain is reduced, scars are minimal, and hospital stays are shortened.

The road to $1 billion
NuVasive estimates that the number of minimally invasive spine surgeries could climb from 25% of all spine procedures in 2014 to 80% by 2021. However, the overall market for spine procedures is only expected to grow at a compound annual growth rate (CAGR) of 4% to $8.7 billion by 2018, according to Research and Markets.

Nonetheless, the opportunity to grow within that market has led NuVasive to declare that it can eventually generate $1 billion in annual revenue. Unfortunately, NuVasive's year-over-year revenue growth has actually slowed down considerably over the past five years:

Fiscal Year

2009

2010

2011

2012

2013

Revenue

$370 million

$478 million

$541 million

$620 million

$685 million

Growth (YOY)

48%

29%

13%

15%

10%

Source: NuVasive annual reports.

Even if NuVasive meets its full-year forecast of $725 million for 2014, that would only represent under 6% growth from 2013. As a result, the road to $1 billion seems to be getting longer every year.

Quarterly growth tells a similar tale
When we look back at NuVasive's earnings and revenue growth over the past four quarters, we see similar problems -- slow earnings and revenue growth:

Quarter

GAAP EPS

Non-GAAP EPS

Revenue/Growth (YOY)

Non-GAAP Operating Margin

Q2 2013

($0.15)

$0.20

$165.7 million / 7.3%

14%

Q3 2013

$0.16

$0.39

$169.2 million / 14%

15.4%

Q4 2013

$0.13

$0.37

$190.8 million / 15.1%

16.3%

Q1 2014

($0.40)

$0.29

$177.5 million / 11.3%

13.2%

Source: NuVasive quarterly earnings.

That big plunge in GAAP EPS during the first quarter was mainly due to more than $30 million in litigation expenses, due to a trademark dispute with Neurovision Medical Products and a royalty dispute with Medtronic. Despite those problems, NuVasive continues to post stronger revenue growth than its larger peers, which all reported anemic growth in spinal products revenue last quarter. 

Company

Spine Business Revenue (Most Recent Quarter)

Growth (YOY)

Stryker

$177 million

0.7%

Zimmer Holdings

$48 million

1%

Medtronic

$744 million

(1%)

Source: Company quarterly earnings.

That disparity indicates that the market for minimally invasive spinal procedures is still growing, although the overall market growth of spinal products remains flat.

The Foolish fundamentals
Last but not least, we should also compare NuVasive's longer-term fundamentals to Stryker, Zimmer Holdings, and Medtronic.

Company

Market Cap

5-Year Price

Forward P/E (2015)

5-Year PEG

NuVasive

$1.6 billion

(9%)

24.4

3.0

Stryker

$29.4 billion

102%

14.7

1.8

Zimmer Holdings

$16.6 billion

119%

14.9

1.9

Medtronic

$58.9 billion

27%

14.4

2.4

Advantage

 

Zimmer

Medtronic

Stryker

Source: Yahoo! Finance, April 30.

NuVasive's stock has underperformed those of Stryker, Zimmer, and Medtronic over the past five years. Yet NuVasive still trades at a premium to all three in terms of its forward P/E and five-year PEG ratios.

The Foolish takeaway
It's certainly a positive sign that NuVasive topped earnings expectations. However, it's hard to see that optimism lasting very long, considering that NuVasive's revenue growth has slowed substantially, its bottom down is weighed down by litigation, and it is trading at a premium to its larger industry rivals despite increasingly low expectations for future earnings growth.

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