Experienced investors know that the stock market is largely a forward-looking mechanism for valuing companies, and while AngioDynamics (NSDQ:ANGO) continues to struggle with very real present-day challenges, management has been making a number of steps to restore this company to attractive long-term growth and margins. Thursday’s fiscal first quarter earnings served to highlight both sides of that story, as current market conditions remain difficult, but management continues to make progress on multiple fronts.
Valuing AngioDynamics today really is an exercise in your confidence that these plans will bear fruit. Today’s valuation already appears relatively generous given the underlying growth rates of the markets the company serves, but if AngioDynamics is truly moving back to a position from which it gain share, a further move in the stock could be waiting.
Tough Market Conditions Continue Into The Fall
Although AngioDynamics is not on the same financial calendar as most med-tech companies, it nevertheless fills the spot as the first med-tech to report for the cycle. To that end, the company’s comments about ongoing weak conditions in interventional cardiology, dialysis, and so on are not terribly encouraging for companies like Covidien (NYSE:COV), C.R. Bard (NYSE:BCR), or Baxter (NYSE:BAX).
Revenue was basically flat as reported, or up about 1% excluding declines tied to supply agreements. Peripheral vascular revenue rose 5%, while vascular access revenues were down by 5% and surgery/oncology declined by 1%.
Margins were decidedly mixed. Reported gross margin looked better by three and a half points, but adjusted gross margin declined by a point and a half due to what the company called "timing" issues. Reported operating income nearly doubled, but adjusted operating income declined almost by half and adjusted EBTIDA was down 21% from the year-ago period.
Gaining Share In Peripheral, But Still Losing Ground In Access
AngioDynamics certainly had some positive new from its peripheral vascular business. AngioVac is still a small business, but the company posted 30% sequential growth. Management also highlighted double-digit U.S. growth in its endovenous laser treatment business, with the growth largely coming from competitive share gains. I don’t know who the donor of this share was, but Covidien did report weakening results in its peripheral business last quarter.
I find the weak results in access, particular lower PICC sales, to be frustrating. Although the clinical data on AngioDynamics’ BioFlo have been very strong, the company is still losing ground to Bard in the PICC market. Granted, Bard is an enormous company (relative to ANGO) with considerable marketing resources and bundling options, but it’s disappointing to see that the lack of tip location for AngioDynamics is overwhelming the benefits of BioFlo to the extent that it appears to be. While the launch of the Celerity tip location device should help, I’m losing some confidence in the idea that BioFlo will lead to significant market share gains in the near term.
Still A Hurry-Up-And-Wait Story
One of the bigger challenges to investing in AngioDynamics is that the company has gone about putting together the pieces to enable future growth, but it’s still going to take some time for that to all play out in the market and show up in the reported financial results.
BioFlo, for instance, is a good product, but it clearly not enough to dramatically alter the balance of power with Bard. Likewise, the AngioVac is a good product, but it’s going to take time to gain share from aspiration catheters sold by companies like Vascular Solutions (NSDQ:VASC) or Merit Medical (NSDQ:MMSI). Looking even further out, the company continues to invest in clinical studies that could ultimate support broader use of the NanoKnife system (where procedure ASPs can run about $5,000), but it will be at least a couple more years before this becomes a more relevant factor in results.
That’s not to say that the company hasn’t been making forward progress. AngioDynamics has been doing a better job of getting its products picked up by distributors and purchasing organizations (including Thursday’s announcement of a sole-source agreement for port products with the Large Integrated Delivery Network Group.
What’s A Fair Set Of Expectations For The Company?
I do think that AngioDynamics is on the right path, but that doesn’t mean I necessarily see robust top-line growth potential. For now I’m looking for long-term revenue growth on the order of 5%. Products like NanoKnife and future acquisitions could move that higher, but the underlying growth of most of AngioDynamics’ targeted markets won’t support significantly higher growth and gaining share against companies like Covidien and Bard could be challenging on a long-term basis, particularly as the company doesn’t have the same level of resources to target markets outside North America.
I am more optimistic about the margin side. I believe the company can get back to double-digit free cash flow margins within five years, and mid-teens margins on a long-term basis. That in turn leads to a free cash flow growth estimate of nearly 20% per year across the next decade (though fiscal 2013 is a relatively low starting point that inflates that growth rate).
The Bottom Line
On a cash flow basis, it’s hard to argue that AngioDynamics is undervalued or that the shares are worth much more than $14. The same is true with other valuation metrics; while it is true that AngioDynamics’ sub-2.0x EV/sales multiple is low for the industry, so too are the company’s growth rate and margins.
With those factors in mind, I’m not tremendously bullish about buying these shares today, though the stock has been quite strong here recently. I wouldn’t be in a rush to sell if I already owned shares, but with today’s valuation already incorporating a rather large portion of what I see as the best-case scenario, I’d wait for a pullback before considering a new purchase.
Stephen Simpson CFA is a former sell-side and buy-side analyst who focuses most of his professional attention on financial and investment writing. In addition to a decade of work as an analyst, Mr. Simpson has worked as a wet-bench biomedical researcher and a consultant in the med-tech industry, as well as writing on a freelance basis for over 10 years. He can be reached via email at firstname.lastname@example.org.