I am sure most of you have been to a doctor in the last year. Likely, your blood oxygen levels were tested using a pulse oximeter. It’s an easy process and goes on your finger, testing your pulse, but also blood oxygen. Masimo likely made it. The Masimo Corp. (NASDAQ: MASI) is a leading niche manufacturer in the medical industry specializing in its signature product, the pulse oximeter. The kick is that it allows doctors to test a patient’s blood oxygen level in a completely non-invasive way.
We see Masimo with its solid upward growth prospects as a solid long-term buy. The stock has increased by more than 50% in the last year, and the company looks to continue its gains into 2019 and beyond.
The financial case
A product done well produces a solid revenue stream. So is it true for Masimo.
Here is a relatable statistic to put the financial story into perspective and evaluate its mettle. One stat we like here at Almington is earnings surprise, or by what percentage the company outperformed or underperformed industry earnings expectations. Over the last four consecutive quarters, Masimo has outperformed the market’s expectations by 32%, 18%, 7% and 1% respectively. The second quarter of 2018 had a noticeable drop off but earnings have remained consistently center around 72 cents per share over the last year. While we’d like to see greater upward growth in EPS, this is hardly a weak performance.
Furthermore, Masimo’s revenue stream is steadily increasing.
Revenue has grown 38% over the last two years (average of around 19% a year), which is solid, though certainly not remarkable, growth. Revenue jumped from $695 million to $798 million last year, a 15% year-over-year growth rate. If the company can maintain near 20% growth moving forward, it will surpass $1 billion in revenue before the end of 2019.
Sometimes, smaller growing companies must spend most of their revenue (or even more than their revenue) on producing the revenue. However, Masimo has produced positive net income each of the last four years, increasing from $73 million in 2015 to $132 million in 2017, an 81% rise in just two years. Solid performance. Expenses have remained fairly steady in terms of SG&A, R&D, cost of revenue and interest/taxes. Masimo executives should look to continue to keep costs stable.
The strategic case
Company-released data makes a strong case for Masimo’s growth. Strategically, the company understands its strong position to grow and is planning further products, markets and strategies. According to one statistic, Masimo has increased its market reach significantly over the last half decade, with over 1.5 million total installed systems, a 50% increase over the period. It can continue to leverage these customers for returning business to bring in healthy revenue.
Further, the company sees its growth strategy working. It hopes to leverage growth in both existing and brand new markets.
We here at Almington would further encourage it to consider research into complementary product lines that might help generate even greater revenue in the future. If the company can have several parallel product lines at once, imagine the potential for growth.
The market read
As the leader in its marketplace, we see Masimo in a singular position to continue to grow handsomely in the future. Although it is trading at almost 50x earnings (not particularly "value" by our normal standards), we see this as a solid purchase long term. Will it be the next unicorn? No, probably not. But, it is a nice, solid addition to your diversified portfolio. It serves as a leader in a niche, but critical market, and makes its products well.
This market isn’t the next big thing or the Apple computer market, but it is clearly an important one. The American and international medical markets are ramping up and will continue to do so as the Baby Boomer generation ages, and the medical market is not one that can suddenly go out of favor. That is good for Masimo because its product -- unless some new product comes to market -- will continue to have need, even in times of wider market downturn.
Verdict
This company isn’t the most flashy or exciting, but it has produced solid results on the back of a necessary, well-made product. It has most significantly made testing for blood oxygen levels much easier, less time-consuming and completely non-invasive. Whenever you can save time in the medical field, that product is sure to do well.
We encourage our readers looking to add to their long-term portfolios to take a hard look at Masimo. It can help add certainty and diversity to your investments, as the product is in a market that is somewhat shielded from sudden market losses. If you are hoping for a quick 300% return on a stock, do not buy Masimo. But, if you are willing to wait to receive a 100% or greater return over several years, this stock purchase might be for you.
Disclosure: I/We have no position in any stock discussed.
This article was co-authored by Clyde Wm. Engle, Jr., an analyst with Almington Capital Merchant Bankers.
