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Morningstar | Growth Headwinds Continue, but Cantel's Narrow Moat Remains Intact; Maintain $92 Fair Value Estimate

Cantel Medical posted fiscal first-quarter results that fell modestly short of our expectations on a reported basis but largely in line with our organic revenue forecast. Cash flow, however, remains on track to meet our expectations for the firm's fiscal year, and we'll likely maintain our $92 per share fair value estimate as a result. While 2019 remains a year of transition and investment for the organization, we think our implied valuation multiple of 35 times adjusted earnings is supported by high-teens earnings growth in 2020 and beyond.

While we've seen more segment level volatility over the last handful of quarters than Cantel typically exhibits, we're leaving our outlook largely unchanged aside from incorporating reported results. Notably, the firm's medical business rebounded nicely, with sales of both capital and consumable goods up over 13% in the quarter. We think this should bode well for the full year following a multi-quarter period of decelerating growth. That said, this positive performance was offset by rare reported declines in both the firm's life sciences and dental businesses. Commentary suggested both were due to timing effects, as larger orders in life sciences slipped out of the quarter and dental distributors de-stocked some inventory. Management indicated that life sciences should return to growth next quarter and end-market sell-through from its dental partners approximated a mid-single-digit rate, which gives us some added confidence in our current outlook.

Acquisitions remain the wildcard in terms of performance this year, with the pending acquisition of Omnia not yet reflected in guidance. The deal is expected to close by February, which could add over $10 million in sales for the full fiscal year. We expect management to continue to view acquisition opportunities as the primary use of capital over time and model further dealmaking over the next five years. This drives the bulk of our higher-than-consensus projections.