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Why CryoLife, Inc. Shares Have Gone Ice-Cold

By Sean Williams – Feb 20, 2014 at 1:25PM

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CryoLife freezes its shareholders after an ice-cold fourth-quarter earnings report. Is this the buying opportunity investors have been waiting for or a reason to stay away from this stock?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of CryoLife (CRY 4.38%), a global human tissue preservation and distribution company, fell as much as 20% after the company reported disappointing fourth quarter earnings results before the opening bell this morning.

So what: For the quarter, CryoLife reported an 8% increase in revenue to $35.5 million, helped primarily by an 11% rise in product revenue, primarily from BioGlue and PerClot, while its adjusted profits, stripping out a number of one-time benefits, was $0.08 per share, a modest jump from the $0.07 EPS profit last year. This might appear decent on the surface, but not compared to Wall Street's estimates, which had called for $34.9 million in revenue (a slight beat) and $0.25 in EPS (a whopping $0.17 miss). Looking ahead, CryoLife is forecasting full-year revenue of $146 million-$150 million with EPS ranging from $0.21-$0.24. Comparatively, both figures were also short of the current consensus estimate on the Street of $0.38 in EPS and $152 million in revenue.

Now what: CryoLife's report itself wasn't terrible, but given how rapidly its share price has appreciated over the past couple of months, a forecast that calls for just 5.1% revenue growth at the midpoint in 2014 and an EPS decline clearly isn't up to par with shareholders. Of particular interest to me are its shrinking gross margins, which are slowly being eroded by a growing R&D budget and modestly higher marketing expenses. Even after today's tumble, CryoLife is valued at around 40 times this year's earnings, which seems a steep price to pay for mid-single-digit growth. For now, I'd much prefer to stick on the sidelines and wait for margins to resume their course upward before considering this stock as a possible buy candidate.

Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool has no position in any companies mentioned in this article. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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