EUR 850.00 For Business Accounts Only

Morningstar | Unexpected CEO Departure Doesn't Weaken Our Exemplary Stewardship Rating

Cantel Medical’s business has been transformed through acquisition since its breakup with former partner Olympus back in 2006, when both sides broke off distribution agreements with the goal of going direct in their respective markets. Since then, management’s strategy of buying regional businesses and scaling them nationally has thrived, with the firm now positioned as the leader in endoscope reprocessing and central water treatment for dialysis clinics across the country. This approach has built two narrow-moat business segments, in our view, that represent over 75% of total company sales and are underpinned by customer switching costs and intangible assets.The company’s strategy has been to extend its reach within the sprawling area of infection prevention and augment its market position through strategic mergers and acquisitions. Management has allocated over $300 million toward its acquisition strategy over the past five years, all while expanding the firm’s margin profile and increasing returns on capital for shareholders. We expect an additional $400 million will be spent over the coming five years as Cantel more decisively develops its international presence. We anticipate this strategy will remain value-accretive as management continues to source synergistic deals at reasonable valuations, while maintaining a conservative balance sheet structure.We expect the firm to generate returns on invested capital in excess of its weighted average cost of capital over the coming decade, owing to the switching costs that have been embedded within its customer relationships and the preeminent brands it has developed in the endoscopy and water treatment end markets. The long life of its products, along with proprietary consumables and service components, have created repeat customer engagements and relationships that we believe are deep enough to signal the existence of a moat. Additionally, the firm’s demonstrated pricing power in the market, while pricing new product platforms at material premiums, supports our view that the company possesses intangible assets that aid in supporting its moat.