Morningstar | Following Strong 2018, Masimo Remains Positioned for Superior Growth; Raising FVE
Narrow-moat Masimo reported another characteristically strong quarter, posting fourth-quarter and full-year figures that fell modestly ahead of our estimates. Management also revised higher its preliminary 2019 outlook, setting the stage for another good year for the business. As we roll our model and tweak our estimates, we're likely to raise our fair value estimate by a high-single-digit percentage, driven by the cash flows received since our last update along with a modestly higher installed base, given the growth trends shown to date.The firm again reported growth across the board, with placements exceeding our estimate by roughly 1,000 units and constant-currency product revenue expanding 11.9% for the year and nearly 13.5% for the quarter. Product gross margin expanded 130 basis points year over year, ending 2018 at roughly 66%. We project more of the same in 2019, with product revenue growth of over 10% and underlying gross and operating margin expansion of roughly 80 and 200 basis points, respectively, in line with management's 24% adjusted operating margin goal for the year. Importantly, we anticipate Masimo's elevated pace of unit placements is likely to continue over the next several years, driven by the firm's ongoing partnership with Philips. The success of this relationship underpins our positive moat trend rating.
Management highlighted that 2018 was one of the best years in Masimo's history as measured by customer wins and retention. Notably, Community Health Systems signed on to fully transition its facilities to Masimo technology and Mount Sinai decided to standardize on the firm's pulse oximeters.
As was the case all year, the company added to its cash balance to end 2018, which now stands at $550 million. Free cash flow generation was particularly strong over the course of the year, aided by tailwinds from working capital that we suspect will continue in the medium term.
Masimo is a medical technology company that develops, manufactures, and markets a variety of noninvasive monitoring technologies. The company provides its products to hospitals, emergency medical service providers, long-term care facilities, physician offices, veterinarians and consumers. The company's main business is Measure-through Motion and Low Perfusion? pulse oximetry monitoring, known as Masimo Signal Extraction Technology? pulse oximetry. The company's products offerings also includes noninvasive monitoring of blood constituents with an optical signature, optical organ oximetry monitoring, electrical brain function monitoring, acoustic respiration monitoring and exhaled gas monitoring.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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