Masimo (BUT, Financial) is a relatively unknown mid-cap medical technology player focused on developing, manufacturing and marketing non-invasive patient monitoring technologies. Founded in 1989, Masimo is a major player in this niche market. The company develops and produces a wide range of monitoring technologies, measuring devices, sensors, patient monitors and automation and connectivity solutions.
The Company’s product line includes pulse oximetry meters, acute care patient monitoring, advanced home temperature monitoring devices, hemodynamic (blood flow) monitoring systems, brain and respiratory management systems. The company went public in 2007, has a market cap of $7.5 billion, and generated $1.24 billion in revenue in 2021.
Acquired Sound United
In April 2022, the company completed the $1.0 billion acquisition of Sound United, a consumer technology company specializing in premium audio and home entertainment brands. Sound United operates iconic consumer audio brands such as Bowers & Wilkins, Denon, Polk Audio, Marantz and Boston Acoustics.
At first glance, the acquisition makes no sense because their products are not related to the medical device industry. Investors are confused about this, causing the stock price to drop.
However, Masimo management said its legacy product line, which involves advanced signal processing, biosensing and photonics technologies, could bring advancements to Sound United’s products. Additionally, Sound United’s established expertise across consumer channels can accelerate its legacy portfolio of consumer healthcare products. These include pulse oximetry readers, continuous thermometers and sleep monitors.
The company said for the second quarter of 2022, it expects Sound United to generate between $180 million and $190 million in revenue and gross margins of around 35%. For the full year, Sound United is expected to generate revenue of approximately $680 million halfway to company guidance and operating profits of between $33 million and $49 million.
The company has shown decent revenue growth over the past three years along with good profitability. Looking back, net profit margins over the past three years were 18.4%, 21.0% and 20.9%.
For the first quarter of 2022, the company has not been immune to macroeconomic issues affecting most businesses in the United States. Revenue growth slowed to 2.0% and earnings per share rose 3.0%. The company said it encountered shortages of critical components (mainly semiconductors) as well as supply chain issues and labor availability issues.
The end customer’s demand was still present, but the company was unable to produce and ship the products ordered. For revenues generated, gross margins and operating margins were maintained and showed no deterioration compared to the prior year period. The company’s balance sheet is very strong with $720 million in cash and no debt outside of capital lease obligations. However, this will change following the acquisition of Sound United.
The company forecasts total revenue of approximately $2.0 billion and EPS in the range of $4.46 to $4.73 for 2022. Consensus analyst EPS estimates are on the lower end from that range to $4.48. This puts Masimo stock at a forward price-to-earnings ratio of 30. The forward price-to-earnings ratio for 2023 estimates is 27, which still looks high. The current ratio of enterprise value to Ebitda is 15 based on 2022 estimates.
Using the GuruFocus DCF Calculator with this year’s estimated earnings of $4.87 as a starting point and assuming a 10-year growth rate of 10%, the value derived comes out to about $100 per share. For the current share price to be justified, it would need to achieve 15% EPS growth over the next 10 years. This seems unrealistic to me at the moment.
Gurus who have recently bought or added to their positions in Masimo stocks include Ballie Gifford and
Ray Dalio (Jobs, Portfolio). Gurus who have reduced their holdings include
Mario Gabelli (Businesses, Portfolio) and
Jim Simons (Jobs, Portfolio).
Masimo may have higher hopes for the Sound United acquisition than its investors, but the stock still looks overvalued at the moment based on current forecasts and analyst estimates. The Sound United product set has significantly lower margins than older Masimo products, so it’s hard to see how this acquisition will be accretive. It may be better to wait and see how the rest of the year goes for the business, or at least wait for a lower price to account for the potential risks the business faces.