Morningstar | Masimo Beats and Raises to Start 2019; Bumping FVE
Narrow-moat Masimo reported first-quarter financials that were in line with our expectations, although better-than-expected growth in driver placement sets the stage for continued strength throughout the remainder of the year. As we tweak our model we'll likely raise our $130 per share fair value estimate by a mid-single-digit percentage, but largely view shares as fairly valued in the market following sizable outperformance over the last year.While changes in accounting standards created some revenue and gross profit comparability issues, product revenue grew approximately 13.1% in constant currency after backing out the $2.5 million in incremental revenue recognized in the quarter associated with an accounting change. The real standout, however, was in the firm's measure of driver placements that expanded nearly 15% after adjusting for management's expanded definition of this metric for 2019. This follows from 14% growth reported for full-year 2018, and came in better than our projection by roughly 3,800 units. Better driver placements lay the groundwork for multiyear revenue growth as each represents a stream of high-margin sensor sales poised to be recognized over several years. Masimo has consistently beat our placement forecast over the last few quarters, helped by strength in both direct and OEM channels. These continued share gains suggest strengthening customer switching costs, underpinning our positive moat trend rating on the name.
The adoption of accounting standard ASC 842 added roughly 120 basis points of revenue growth in the quarter, but it also pressured gross margin by a similar figure. This is due to the new standard requiring the revenue and costs associated with equipment placements to be recognized earlier in the contract period. Management believes these variances will wash out over the course of the year, implying the firm remains on track to meet our 24% operating margin projection for 2019.
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.
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