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Robert Abbott
Robert Abbott
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Abiomed: Driven by Demographics and Innovation

This medical device maker offers a strong balance sheet, above-average profitability and a fair valuation

October 01, 2020 | About:

Some countries, the U.S. in particular, are growing older - i.e. they have "aging populations." Abiomed Inc (NASDAQ:ABMD), a medical devices company, reports that the number of Americans over the age of 65 will increase by 44% by 2030.

As they age, they will need more medical services, and in particular, older people will need treatments for heart conditions, coronary artery disease (CAD) and heart failure (HF). According to the company, 15 million people are living with CAD. What's more, obesity and Type II diabetes is rapidly increasing the number of CAD cases for 10% of the world's population.

In response, Abiomed develops new products to help physicians treat these conditions. Its focus is on impellas, small pumps that pull blood out of the heart and push it into the aorta, thus fully or partially bypassing the left ventricle:

Despite the expertise needed to design and manufacture these products, Abiomed does not have the field to itself; in its 10-K for fiscal 2020, it noted, "Competition among providers of treatments for the failing heart is intense and subject to rapid technological change and evolving industry requirements and standards."

Some of those competitors are much bigger, but the company notes it also faces challenges from newcomers: "several early-stage companies, that are developing heart assist products, including implantable left ventricular assist devices and miniaturized rotary ventricular assist devices that directly and indirectly compete with our products."

How does Abiomed stay afloat and deliver profits for shareholders? In large part, it does so with large investments in the research and development that leads to new and improved products. Over the past five years it has doubled its research budget to about $100 million in fiscal 2020.

Thanks mainly to that research, it now has a patent portfolio which comprises 850 patents and 720 patents pending. One of the most important fruits of that innovation is the Impella CP with SmartAssist®, which allows physicians to monitor, manage and wean patients (weaning refers to removal of the device after several days of use).

Note how the Covid-19 crisis has pulled down Abiomed's revenue and operating margin, but not its cash flow results. Its revenue has suffered because hospitals are pushing back non-essential heart operations to handle coronavirus patients and prevent exposing vulnerable populations to the virus.

Financial strength

Abiomed financial strength

Abiomed has an exceptionally strong balance sheet, with no debt. One line that deserves the attention of investors is the return on investesd capital (ROIC) compared to the weighted average cost of capital (WACC), which stands at 24.43% versus 8.46% and indicates overall profitability.

Profitability

Abiomed profitability

Again, the company has achieved strong performance with double-digit numbers all the way down the profitability table.

While revenue has dropped in the past months, Abiomed has made up for it by growing Ebitda and earnings per share without non-recurring items at a faster rate.

Valuation

Abiomed GF Value

While the GF Value line finds that the company is fairly valued, the price-earnings ratio is very high at 80.7. Still, that's about nine points less than the company's 10-year median of 89.16. The stock is expensive compared to its competitors and peers, as the overall industry has a 10-year median price-earnings ratio of 34.11.

Obviously, investors have been willing to pay a lot for the kind of growth. To put that into context, the PEG ratio, which is calculated by dividing the price-earnings ratio by the average Ebitda growth rate over the past five years, comes in at 1.52. That's reasonable, considering a PEG ratio of 1.00 is considered fairly valued. A ratio of 1.52 is relatively low in a market where so many companies are overvalued.

Before winding up on valuation, let's take a look at Abiomed's price chart over the past decade:

Abiomed 10 year price chart

From $10.89 in October 2010 to the current price of $277.06, investors who held throughout that period would have enjoyed a 25-bagger. Investors who sold out at higher prices in the recent spike would have done even better.

Dividend and share buybacks

Abiomed dividend

As this short table shows us, Abiomed does not pay a dividend and it has not bought back shares either. In fact, it has issued more shares than it has bought back.

So, if you want to make money with this company, the only way to do it is with capital gains. And, as we saw, those capital gains have been extremely rewarding for investors who bought and held.

Gurus

Gurus haven't been too enthusiastic about the stock during this calendar year:

Abiomed guru buys and sells

Only six of the gurus that GuruFocus follows have positions in Abiomed. PRIMECAP Management (Trades, Portfolio) reduced its stake by nearly 10% to end the most recent quarter with 2,642,812 shares, good for a 5.87% stake in the company.

Jim Simons (Trades, Portfolio) of Renaissance Technologies added nearly 10% to end the quarter with 2,250,122 shares and a 4.99% stake in Abiomed. Frank Sands (Trades, Portfolio) of Sands Capital Management added less than 1% to finish with 1,464,468 shares.

Conclusion

In volatile times like these, investors can do well to buy stocks that are almost entirely immune to bankruptcy. Abiomed has no debt, higher than average profitability and is available at what appears to be fair valuation.

While it operates in a heavily competitive niche, it spends enough on research to back up its existing products and have potential new products in the pipeline. And, as noted at the start, it has demographics working in its favor for quite a few years to come.

The only way to profit on this stock is through capital gains. There is no dividend, so income investors will pass it by. Growth investors may want to put it under the microscope because the price has the potential to go up once hospitals get back normal operations. Value investors will appreciate its lack of debt but might wait for a pullback to gain a margin of safety.

Disclosure: I do not own shares in any of the companies named in this article.

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About the author:

Robert Abbott
Robert F. Abbott has been investing his family’s accounts since 1995 and in 2010 added options -- mainly covered calls and collars with long stocks.

He is a freelance writer, and his projects include a website that provides information for new and intermediate-level mutual fund investors (whatisamutualfund.com).

As a writer and publisher, Abbott also explores how the middle class has come to own big business through pension funds and mutual funds, what management guru Peter Drucker called the "unseen revolution."

Visit Robert Abbott's Website


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