The CEO of Masimo Corporation (MASI, Financial) recently bought a significant number of his company’s shares. According to the GuruFocus CEO Buys screener, Joe Kiani bought 39,778 shares of his company at approximately $141.46 each. That amounts to a value of a staggering $5.6 billion.
This is a significant vote of confidence in his company’s future. Thus, let's take a look at this stock to see whether it could be a good deal for investors as well.
About Masimo
In its 10-K for 2021, the company describes itself as follows:
“We are a global medical technology company that develops, manufactures and markets a variety of noninvasive monitoring technologies and hospital automation™ solutions. Our mission is to improve patient outcomes and reduce the cost of patient care.”
Its core business is pulse oximetry, which involves the noninvasive measurement of the oxygen saturation level of arterial blood, as well as the pulse rate. Most commonly, this means sensors attached to an extremity such as a fingertip.
Masimo offers a wide range of products, including both off-the-shelf and custom models. It sells these products to hospitals, emergency medical service (EMS) providers, home care providers, physician offices, veterinarians and individual consumers.
The company was first incorporated in California in 1989 and then reincorporated in Delaware in 1996. It is based in Irvine, California, has a market cap of $7.44 billion and had revenue of $1.2 billion in full fiscal 2021.
It has two main operating segments: health care and non-health care. The former segment delivered $327 million in revenue in the third quarter of 2022, while the latter provided $222 million.
Competition
The medical device industry is highly competitive. Masimo's main competitor is Medtronic PLC (MDT, Financial), which holds a substantial share of the pulse oximetry market.
Some of its products face competition from other large technology companies, including Alphabet Inc. (GOOG, Financial) (GOOGL, Financial), Amazon.com Inc. (AMZN, Financial), Apple Inc. (AAPL, Financial) and Samsung Electronics Co. Ltd (SSNLF, Financial).
Despite the competition, Masimo does have competitive advantages. It noted in the annual report, “We rely on a combination of patent, trademark, trade secret, copyright and other intellectual property rights and measures to protect our intellectual property.”
As of Jan. 1, 2022, it had some 800 issued patents and 500 pending applications in numerous countries. It also had about 100 trademarks registered in the U.S. and 500 in other countries.
As the following chart shows, Masimo has convincingly outperformed Medtronic over the past decade, though investors should note these companies offer different products for the most part with only some overlap:
Financial strength
Masimo receives a 6 out of 10 score, based on its debt burden, debt-to-revenue ratio and its Altman Z-Score:
We see a lot of red and orange bars in the charts in this table, but it’s not necessarily a poor showing.
Until this year, Masimo operated with no short-or long-term debt. But, in 2022, it added $14 million in short-term debt and $951 million in long-term debt. Why the sudden upturn in the debt load?
On April 12, it announced it would spend $1.025 billion to acquire Viper Holdings, the parent company of Sound United. Masimo CEO Kiani said, in a press release:
“We believe Masimo’s expertise in advanced signal processing, biosensing, and photonics technologies combined with Sound United’s audio and home automation technologies will bring about natural and yet non-intuitive solutions to people around the globe in home and in hospitals. Masimo will leverage Sound United’s expertise across consumer channels to accelerate distribution of the combined company’s expanding portfolio of consumer-facing healthcare products.”
For the third quarter of 2022, the acquisition pushed up revenue by 78,7% over the same period in 2021. In dollars, that amounted to $549.3 million this year compared to $307.4 million last year. In other words, the acquisition was immediately accretive.
It is also generating enough new revenue to more than cover the interest expenses. Overall, I consider the company to be financially strong.
Profitability
Masimo shines in profitability, with a full 10 out 10 ranking. That’s based on the strength of its operating margin, trend of the operating margin, Piotroski F-Score, consistency of its profitability and predictability rank:
Its operating margin is better than 69% of peers and competitors in the medical devices & instruments industry. However, its 10-year trend of the operating margin is disappointing. It has only gone up twice in the past decade, in the years ending in December 2016 and 2018:
As we saw on the financial strength table, Masimo has a Piotroski F-Score of 4 out of 9, which GuruFocus says is “typical for a stable company.”
Its profitability has grown relatively consistently over the past decade:
Finally, it has a 4.5 out 5.0 ranking for predictability, which is very good.
Except for the consistency of its operating margin, the company has been suitably profitable.
Growth
This ranking, of 10 out of 10, is based on Masimo’s three- and five-year revenue growth rates, its five-year Ebitda growth rate, and the predictability of its five-year revenue growth:
There’s not much doubt that management knows how to grow its revenue and grow it consistently:
The chart shows a remarkable predictability of revenue growth.
The chart for Ebitda growth looks much the same as that for revenue, and has averaged 15.17% per year over the past decade.
This is a good growth stock for investors who want to see the top and bottom lines heading upward.
Dividends and share repurchases
In keeping with its focus on growth, Masimo does not pay a dividend. In the first five years of the past decade, the company did reduce the number of shares outstanding, but since then we’ve seen more net issuances than buybacks.
Valuation
Masimo receives a lowish ranking for valuations, 4 out of 10, based on the price-to-GF-Value ratio. The price, at the close of trading on November 23, 2022, was $143.02 while the GF-Value price was $407.39.
The current price, then, is considered significantly undervalued.
On the other hand, it has a price-to-earnings ratio of 46.32, which is higher than the majority of firms in the industry. Combine that high P/E ratio with a five-year Ebitda growth rate of 11.44% and you have a relatively high PEG ratio of 4.88.
Since Masimo has a strong predictability rating, we can have confidence in the discounted cash flow calculator. The DCF concludes that the company is overvalued:
Finally, let’s look at a 10-year price chart:
The share price has fallen by more than half in the 12 months since November 2021, which suggests it was a victim of the widespread market meltdown. I therefore think it likely the price will bounce back to some extent when the market recovers.
The fundamentals
Overall, Masimo receives a healthy GS Score of 90 out of 100. Where it falls short is on the value ranking, which we have discussed and the momentum ranking. The latter is more relevant to traders and short-term investors than to investors who look out five to 10 years.
Gurus
Six gurus own shares of Masimo, and the three largest stakes are those of Steven Cohen (Trades, Portfolio) of Point72 Asset Management (203,088 shares), Baillie Gifford (Trades, Portfolio) & Co with 93,634 shares and Mario Gabelli (Trades, Portfolio) of GAMCO Investors with 85,000 shares.
Institutional investors own 70.76% of the shares outstanding and insiders own 4.08%. Chairman and CEO Joseph E. Kiani owns the lion’s share among insiders, with 427,656 shares (as of February 2022).
Conclusion
CEO Kiani already owned nearly 388,000 shares before making his most recent purchase of Masimo shares. So his recent buy should be seen as a gesture of confidence. And, based on the key fundamentals we’ve examined, I believe current and potential investors should have confidence, too.
