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Morningstar | Fourth Quarter Continues Streak of Impressive Growth at Merit; Outlook Implies More to Come

No-moat Merit Medical reported another consistent quarter to close out 2018. Revenue and earnings for the full-year fell in line with our forecast, with reported revenue growth of 21.3% and organic constant currency growth of 11.4% compared with our estimates of 20.7% and 11.9%, respectively. As we roll and update our model, we'll likely raise our $33 per share fair value estimate by a modest amount to incorporate the cash flows received since our last update, but we don't intend to make any meaningful changes to our long-run projections. Shares continue to look quite expensive under our framework, and we would await a bigger pullback before considering investment.

Management issued 2019 and 2020 guidance that largely bracketed our expectations, giving us added confidence in our longer-term free cash flow estimates for the franchise. For the coming year, revenue is expected to fall between $1.01 and 1.03 billion with adjusted gross margin expanding nearly 200 basis-points over 2018 at the midpoint. Importantly, roughly half of this expansion can be attributable to underlying operational improvements (in line with recent performance), with the other half driven by the mix benefits of acquiring higher-margin lines of business over the last year. The outlook in 2020 calls for another year of 8%-10% core revenue growth, consistent with 2019, and an additional 100 to 150 basis points of gross margin improvement, which lands only slightly ahead of our expectations.

The acquisition of Cianna Medical closed in the quarter and by all accounts its integration seems to be going well. Specifically, management indicated that there has been no meaningful turnover in the salesforce since bringing the team on board, which will be critical to achieving the reiterated $50 million to $56 million sales guidance for the business over the course of the coming year.