Globus Medical's (NYSE:GMED) stock dropped 10% in the last week in the wake of the medical device maker's preliminary earnings report. Despite touting record fourth-quarter and full-year earnings with double-digit growth, investors had higher expectations -- in part, due to Globus' guidance for 2020.
Globus specializes in developing and commercializing products to aid people who have musculoskeletal disorders. With more than 190 products, the company operates through two main divisions. The musculoskeletal solutions division focuses on implantable devices, therapies, and surgical instruments used for spinal, orthopedic, and neurosurgical procedures. The enabling technologies division focuses on computer-aided solutions for imaging, navigation, and robotic-assisted surgery.
Globus' stock dips
Globus provided 2020 guidance of $850 million in sales and $1.82 in fully diluted non-GAAP earnings per share (EPS). And 14 analysts projected between $1.82 and $1.97 in EPS for 2020, meaning the guidance comes in at the bottom end of the range. The result? Investors triggered the sell-off.
However, it's not all bad news for the company or shareholders. The stock gained 49% in 2019. Globus initially guided for 2019 revenue of $770 million. Each quarter, it increased those numbers, with the most recent range hitting $775 million to $783 million. Thus, investors should welcome management's announcement last week of $784.7 million in 2019 sales.
Healthy business growth for Globus
Investors should take note of the earnings growth for the two main business units. Revenue from the musculoskeletal solutions division grew 8.7% in the fourth quarter. The enabling technologies business saw sales grow 10.1% over the course of the year. Breaking it down by geography, the U.S. posted fourth-quarter revenue growth of 8.1% compared to 5.5% for Globus' international sales.
While Globus has hit the middle or top end of analyst quarterly expectations throughout the past few years, it missed estimates in the first quarter of 2019. The company noted lower-than-anticipated sales for its robotics division driven by "elongated selling cycles and seasonality." Investors may speculate whether the first quarter of 2020 will repeat this performance, thus dragging down revenue.
While a lesser-known name to retail shareholders, institutional investment funds own roughly 70% of Globus' stock. This includes large mutual fund and ETF firms such as BlackRock, Vanguard, and Janus Henderson Group which each own over 7%. Insiders hold most of the remaining shares.
Globus' Chairman controls the votes
Globus has two classes of stock: Class A common stock trades on the New York Stock Exchange, and Class B common shares, of which there are 22.43 million, do not trade and are entirely owned by former CEO and current Chairman of the Board David Paul. Each Class B share entitles the holder to 10 votes per share compared to one vote per share for Class A shares. As a result, the chairman controls 74.6% of the voting power.
Investors who are new to the company need to get comfortable with this large ownership and voting control position. The NYSE deems Globus a "controlled" company because a single shareholder owns more than 50% of the voting stock. Controlled companies are exempt from certain corporate governance requirements. Globus noted in its last proxy statement that "all of the members of our Audit Committee are independent," while that was not the case for the compensation and nominating committees. Having independent members on the audit committee is probably the most important of the three.
Investors remain in a holding pattern until Feb. 20, when Globus plans to release its final audited earnings for the fourth quarter and full year of 2019. While last week's announcement provided preliminary estimates, investors will want to drill down to make sure growth stays on track. Patient healthcare investors who buy Globus stock during the current sell-off will likely be rewarded down the road.