EUR 850.00 For Business Accounts Only

Morningstar | Merit Reports Higher Revenue on Weaker-Than-Expected Margins; Moderately Raising Our FVE

Merit Medical reported another quarter that, on balance, largely met our expectations with revenue outperformance offset by weaker margins across the board. This continues a trend we highlighted last quarter, which was punctuated by management's updated full-year outlook that now calls for better sales growth on lower than expected margins. On net, our multiyear cash flow forecasts have improved modestly after incorporating reported results, and we anticipate raising our fair value estimate for this no-moat firm by a mid- to high-single-digit percentage to incorporate our elevated outlook and the cash flows received since our last update.

After assessing management's revenue disclosures, we believe the difference between our 16.6% growth estimate and the firm's 20.5% reported result was likely split fairly evenly between currency variances and better organic growth. We've raised our estimates for the remainder of the year to incorporate these persistent effects, while considering management's revised guidance of $870 million to $880 million. Additionally, management highlighted product shortages suffered by a competitor, which could further enhance the company's near-term sales potential. While we're hesitant to put too much emphasis on this dynamic given the lack of strong moat surrounding the affected catheter and guide wire product portfolio, we would highlight that Merit's gains in the wake of product recalls at Cook Medical throughout 2016 have proven more resilient than we would have likely given credit for at the time.

Offsetting the impressive 9.8% constant currency organic revenue growth was margin performance that failed to meet our forecast for the second consecutive quarter. We believe management was somewhat aggressive in maintaining its full-year gross margin outlook following first-quarter results. With expectations now roughly 100 basis points lower, we think our updated non-GAAP gross margin forecast of 49.1% appears much more attainable.