EUR 850.00 For Business Accounts Only

Morningstar | Conmed's First-Quarter Results Meet Our Expectations; Shares Again Look Expensive

No-moat Conmed reported first-quarter results that largely met our expectations, and we don’t foresee many changes to our model that will push our $60 fair value estimate significantly in either direction. Segment revenue and non-GAAP profits were consistent with our view, although GAAP profitability and cash flow suffered from higher interest expense and additional costs associated with the ongoing integration of Buffalo Filter. Organic revenue growth clocked in at 6.3%, toward the high end of management's revised guidance range of 5.25% to 6.25% in constant currency for the full year. Total constant currency revenue expanded at a 9.3% clip in the quarter after incorporating Buffalo Filter's $6.1 million contribution following the transaction's Feb. 11 close.

Both the firm's general surgery and orthopedic segments did quite well, supported by both international and domestic markets. It seems management's increased investment in research and development over the last several years has begun to make its mark on the firm's performance. We expect growth in development dollars to continue throughout our five-year forecast period, which helps support our revenue growth projections that average nearly 7% annually.

Capital deployment at the firm is likely to remain constrained for quite some time after taking on additional debt to finance the Buffalo Filter deal. We estimate the firm's pro-forma debt-to-adjusted-EBTIDA ratio sits roughly near 4.6 times. Given debt reduction and profit improvement, the firm should be able to lower its leverage level below 3 times by the end of 2021, in line with management's stated goals. Until then, we think internal innovation and expanding the adoption of surgical smoke evacuation globally will be the primary drivers of continued above-market revenue growth for the business.