CONMED Corp.: How Much More Can It Squeeze?

Why It's Featured: This year looks good, thanks to cost cutting and a new deal.
Danger Zones: Future growth requires more new products while R&D needs more money.

CONMED Corporation CNMD, a medical technology company, provides surgical devices and equipment for minimally invasive procedures and monitoring.  The company's products serve the clinical areas of arthroscopy, powered surgical instruments, electrosurgery, cardiac monitoring disposables, endosurgery, and endoscopic technologies.

It offers arthroscopy products, including powered resection instruments, arthroscopes, reconstructive systems, tissue repair sets, metal and bioabsorbable implants and related disposable products, and fluid management systems; powered surgical instruments used to perform orthopedic, arthroscopic, and other surgical procedures; and electrosurgery products comprising pencils, active electrodes, ground pads, generators, coagulation systems, and smoke evacuation and vessel sealing systems.

Its patient care products comprise vital signs and cardiac monitoring products, including pulse oximetry (a non-invasive method allowing the monitoring of the oxygenation of a patient's hemoglobin) equipment and sensors, ECG electrodes and cables, cardiac defibrillation and pacing pads, and blood pressure cuffs; surgical suction instruments and tubing products; and IV products used in critical care areas.

CNMD also provides endosurgical products, such as clip appliers and laparoscopic instruments; and cutting trocars, suction/irrigation accessories, laparoscopic scissors, dissectors and graspers, active electrodes, insufflation needles, linear cutters, and staplers. 

In addition, the company offers endoscopic technology products comprising mucosal management devices, forceps, scope management accessories, bronchoscopy devices, dilatation, stricture management devices, hemostasis, biliary devices, and polypectomy.

Its products are used by surgeons and physicians in orthopedics, general surgery, gynecology, neurosurgery, and gastroenterology specialties. The company operates primarily in the United States, Canada, the United Kingdom, Japan, and Australia.  CONMED Corporation was founded in 1970 and is headquartered in Utica, New York.

Management's been on a cost cutting program that's paying real dividends.  Earnings were up 16% in the first quarter, mostly due to lower expenses.  Revenues were a bit higher but organic growth was minor.  Sales have been hurt by the slow economy and companies' tight capital expenditure budgets.  Profits increased notably because production was transferred to lower cost facilities and consolidation of the back office.  Expect more benefits from these moves in the coming quarters.

Those benefits will show up in earnings.  Five analysts have a consensus estimate for earnings this year to be $1.78, well above the $1.50 of last year.  Next year they see a bump to $2.04.  For the second quarter, consensus is for 45 cents, 10 cents above last year's results in the second period.  For the third quarter, look for 40 cents compared to 33 cents last year in the second.

Revenues should hit $780.12 million this year, if the analysts are right, a gain of 7.6% over last year's $725.08 million.  They see $814.27 million for 2013, another 4.4% gain.  Increased sales should be coming from the new partnership with MTF (Musculoskeletal Research Foundation).  CNMD is the exclusive marketing representative for MTF's sports medicine alograft tissues and responsible for the distribution of its Cascade Platelet-Rich Plasma product.  Bottom line contribution may be 20 cents this year.

Those are the positives.  There are a couple of negatives to consider.  The first is that management has been cutting costs through restructuring for some time.  How much more they can cut is not certain.  The second is that organic sales growth has slowed, and without the MTF deal for this year, they most likely would be flat.  That means new growth needs to come from new products or more venture partners or acquisitions.  But finances are not robust so Research and Development isn't getting the kind of funding needed for a solid pipeline of new products.  Acquisitions would also be difficult but the company only carries debt that is 19% of capital so there is some room for borrowing if the right deal comes along.

- Essential Numbers:
- Price to sales ratio: 1.03
- Price to book: .85
- Operating margin: 10.18%
- Profit margin: .23%
- Return on equity: .29%
- Return on assets: 4.53%
- Total cash: $19.54 million
- Cash per share: 69 cents
- Total debt to equity: 33%
- Current ratio: 2.12
- Book value per share: $20.82
- Beta: 1.3
- 52 week change: .71%
- Total share outstanding: 28.29 million
- Held by insiders: .84%
- Held by institutions: 96%
- Dividend: 60 cents
- Yield: 2.3%

CNMD is a good story for now.  But the future isn't quite as positive as growth will depend on new products from an R&D department that needs more money to produce.  Maybe there are more deals in the works like the MTF venture.  That would be one way to grow.  And growth is necessary in this field, one that is dominated by large companies with huge budgets and big market share.  Proceed with caution on CNMD.

- Company Web site: www.conmed.com

- Ted Allrich
June 7, 2012