Sometimes, adversity brings opportunity. And then again, sometimes adversity brings gut-wrenching pain and suffering. Time will tell which proves to be the case for small-cap med-tech company CantelMedical
For those relatively new to the stock and its story, let's go over some of the bigger changes. First, Olympus decided to end its agreement with the company, whereby Cantel distributed endoscopes and other products in Canada. Not only had this agreement been in place for a very long time, it represented a large chunk of the company's business (about 25% of recent sales and 45% of operating income).
But that's not all. The company is also facing major consolidation in the dialysis services industry -- the consumers of its dialyzer reprocessing products and services. Fresenius
So with all of that in mind, Cantel's recent earnings report is perhaps not as clear or predictive as you might normally hope. Sure, revenue was up 29% as reported, but organic revenue (net of the acquisition of a dental supplies business) was up only 3%, and operating income would have been lower were it not for that acquisition. And don't forget, once that Olympus deal ends at the end of the next fiscal quarter, a big chunk of revenue and income vanishes.
The question now is whether the company can get enough new business from opportunities like dental supply and water treatment (filtration/purification) to compensate and continue growing. On one hand, both are viable markets. On the other hand, both have plenty of competitors -- some of whom are a lot bigger and more entrenched than Cantel.
Cantel's stock price today doesn't seem to be giving much benefit of the doubt for future growth. And I think that's a pretty smart move. Perhaps the company will successfully remake itself and find a path back toward sustainable growth, but it won't be easy. And since a key part of valuation is the risk involved in the likelihood of future growth, I can't say that these shares are especially cheap today.
For more medical missives:
Cantel is a Motley Fool Hidden Gems recommendation.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares). As an analyst, he once followed the med-tech space on a day-to-day basis but has since broadened his horizons.