Media-shy investment firm PRIMECAP Management (Trades, Portfolio) revealed earlier this week it upped its stake in LivaNova PLC (LIVN, Financial), which had an impact of 0.04% on the equity portfolio.
The California-based firm, which was founded in 1983, manages the Odyssey Funds. It seeks to provide long-term capital appreciation by investing in companies with stronger growth potential than their valuations suggest and that trade at reasonable prices.
According to GuruFocus Real-Time Picks, a Premium feature based on 13D, 13G and Form 4 filings, Primecap increased its position in the health care company by 17.39% on April 30, buying 799,183 shares. The stock traded for an average price of $47.90 per share on the day of the transaction.
Primecap now holds 5.40 million shares, accounting for 0.24% of the equity portfolio. Established in the fourth quarter of 2018, GuruFocus estimates the firm has lost 26.50% on the investment so far.
About LivaNova
Headquartered in the U.K., LivaNova develops medical devices used for cardiac surgery and neuromodulation. It was formed in February 2015 through a $2.7 billion merger between Cyberonics Inc. and Sorin S.p.A.
The company operates through four segments. The largest business, Cardiopulmonary, generated 49% of revenue in 2022.
Pipeline update and management changes
In March, LivaNova received clearance from the U.S. Food and Drug Administration for its Essenz Heart-Lung Machine, a next-generation perfusion system, for use in cardiopulmonary bypass procedures. The device has also been approved in Canada and Japan. In Europe, the company is launching its broad rollout of the machine following the success of a limited commercial release.
Further, in its most recent financial report, the company provided updates for its RECOVER clinical study, which recorded its randomized 500th unipolar depression patient.
Despite this progress and good preliminary earnings results, on April 14, the board of directors announced that Damien McDonald resigned as chief executive officer. His departure, according to Mike Matson, a senior research analyst at Needham & Co., followed several pipeline disappointments, including the scrapping of the Caisson transcatheter mitral valve replacement program.
Chair of the Board William A. Kozy was appointed as interim CEO. His job, according to the company, will be to “help the executive leadership team maintain the focus on growth and profitability” as it searches for a replacement.
Earnings review
On May 3, the company reported robust first-quarter results.
For the three months ended March 31, LivaNova posted 9.7% growth in revenue from the prior-year quarter to $263.40 million. The net income of $7.40 million, or adjusted earnings of 43 cents per share, increased from $3 million a year ago.
In a statement, Kozy commented on the “solid” financial performance and “important product and clinical milestones.”
“We look forward to building on this progress,” he said. “I am engaging with our experienced executive leadership team as we maintain focus on executing on our core growth drivers, delivering on our clinical and product pipeline opportunities, and generating cash."
Looking ahead to the full year, LivaNova expects revenue growth of 4% to 6% on a constant-currency basis. Adjusted earnings per share are projected to range from $2.50 to $2.70, while adjusted free cash flow is anticipated to fall between $80 million and $100 million.
Valuation
LivaNova has a $2.51 billion market cap; its shares were trading around $46.60 on Wednesday with a forward price-earnings ratio of 35.87, a price-book ratio of 2.03 and a price-sales ratio of 2.38.
The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.
At 60 out of 100, the GF Score indicates the company has poor performance potential. While it received a high rating for GF Value, the financial strength and profitability ranks are more moderate and growth and momentum are low.
LivaNova also has a predictability rank of one out of five stars. According to GuruFocus research, companies with this rank return an average of 1.1% annually over a 10-year period.
Guru interest
Of the gurus invested in LivaNova, Primecap has the largest stake with 10.03% of its outstanding shares.
Investment firm Barrow, Hanley, Mewhinney & Strauss has a notable position as well with 4.33% of outstanding shares. The stock is also being held by David Einhorn (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Bestinfond (Trades, Portfolio), Jefferies Group (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio).
Portfolio composition and performance
Nearly 60% of the firm’s $109.23 billion equity portfolio, which the 13F filing showed was composed of 334 stocks as of the end of the fourth quarter, is invested in the health care and technology sectors.
Other medical device and instruments companies making up Primecap’s portfolio as of Dec. 31, 2022 included Boston Scientific Corp. (BSX, Financial), Zimmer Biomet Holdings Inc. (ZBH, Financial), Abbott Laboratories (ABT, Financial), Insulet Corp. (PODD, Financial) and Edwards Lifesciences Corp. (EW, Financial).
GuruFocus data shows the firm returned -15.15% in 2022, slightly outperforming the S&P 500’s -18.11% return.
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
