EUR 850.00 For Business Accounts Only

Morningstar | Conmed's 3Q Results Meet Our Expectations, But Profit Upside Needed to Justify Valuation

No-moat Conmed reported third-quarter results that largely tracked our expectations, after handily beating our forecasts for the first half of 2018. We don’t anticipate making many changes to our model, and don't foresee a material change to our $55 per share fair value estimate. Our valuation implies approximately 22.5 times and 12.5 times our 2019 forecasts for adjusted earnings and EBITDA, respectively.

Overall, the firm grew revenue 8.1% in constant currency with general surgery continuing to our perform, reporting 10.7% growth versus 5.8% for the orthopedic segment. That said, we're encouraged that growth has continued to remain positive in both domestic and international markets for both segments following a multiyear rough patch for the ortho business in the U.S. Further, we applaud management's continued investment in internal development, which we believe has been a key driver in moving the business back toward market-like growth rates. Excluding an in-process research and development write off, R&D was 4.9% of sales, up from an average near-4.1% for all of 2017. We expect this metric to continue to trend higher to help maintain the firm's current pace of growth.

As a result of these investment needs, we doubt we'll see any meaningful adjusted operating margin expansion this year and expect only modest improvement in 2019. We're hopeful that management can transition from needing to invest in the company's product portfolio, to optimizing profitability over the next handful of years.

Finally, management hasn't announced much in the way of business development activity year to date, but we'd be surprised to see a similar lack of activity in 2019. Management has made nice progress on deleveraging the firm's balance sheet over the last few years, and we think the firm's net leverage ratio could fall to 2.0-2.5 times by the end of next year.