Turnarounds take time and that's just the way it is. So don't kid yourself: It's going to take some time for Arrow International (NASDAQ:ARRO) to fix itself up and get moving in the right direction again.
Accordingly, this medical device company's first-quarter earnings weren't exactly a glowing testament to breakout growth. Sales were up less than 1%, operating income fell by about 12%, and net income was down more than 11%.
The problem here is one that a lot of companies might actually wish they had -- Arrow International lacks the necessary capacity to keep up with demand and so cannot fill its back orders. As a result, central venous catheter sales were down 1% (up just 2.3% excluding the temporarily discontinued NeoCare line), specialty catheter sales were up 3.7%, and cardiac care sales were flat.
Fortunately, there is some good news on the capacity front. A new facility for multi-lumen catheters in Chihuahua, Mexico, is up and running, and Arrow International hopes to have a second line going in March of this year. Elsewhere, a new facility is under construction in the Czech Republic. As this new capacity comes on line, the company should be able to return to the high single-digit growth it has historically delivered.
It's fair to ask yourself, though, whether it's worth hanging around for that new capacity. After all, this is a company with relatively modest historical growth in operating income and structural free cash flow. Nevertheless, the stock has been surprisingly volatile over that same period and has more than tripled from its lows back in 1999.
This is a tougher-than-average nut to crack. On one hand, you have a company with solid market share in central venous and specialty catheters and a solid, albeit not scintillating, history of performance. On the other hand, you have modest growth and the threat that competitors like Datascope (NASDAQ:DSCP) and Bard (NYSE:BCR) will capture share while Arrow International remains capacity-constrained. Considering that there are other, faster-growing medical device companies out there with attractive valuations, I think this particular arrow is pointing away from "buy" right now.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
