February 03, 2009 - 9:17am EST by
2009 2010
Price: 15.45 EPS $0.70 $0.88
Shares Out. (in M): 16 P/E 22.0x 18.0x
Market Cap (in $M): 253 P/FCF 22.0x 18.0x
Net Debt (in $M): 42 EBIT 25 28
TEV (in $M): 295 TEV/EBIT 12.0x 10.0x
Borrow Cost: NA

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Cantel Medical is a roll-up of healthcare product companies, loosely grouped as being in area of infection protection and control.  It sells water purification systems, dental consumables, and endoscope reprocessing equipment.  The stock has doubled in the last few months and was recently added to the IBD 100 on the back of a reasonable quarter, but the move is overdone.  A more reasonable value would be $9, or 14x my f'10 estimate of $.66.

Revenue Growth Estimates Are Too Optimistic

Last quarter, revenues grew 7%, which is slightly overstated due to acquisition activity, but also reflects a planned move out of low-margin dialysate sales.  Giving the company the benefit of the doubt in this regard, let's assume that the base consumable business (70% of total) can continue to take share and grow at a 10% annual rate in markets that grow in the 3-5% range.  30% of their sales are for capital equipment, while roughly 20% of their sales are international.  Assuming that the capital equipment sales drop 15%, while the foreign exchange becomes a headwind of as much as 20%, I estimate that the company will see (2)% sales growth in 2009, versus expectations of +6%.

Next Quarter is Likely to Disappoint

From last quarter's call:

Andrew Krakauer (CEO): Well, we obviously don't give forecasting and guidance, but I would say this was a quarter where truly everything did come together. We had just great sales of our disposables and disinfectants. The service business is coming up and we're - and our U.S. service business as the numbers are rising, we're sort of getting above that breakeven and now margins are starting to increase. But, we do see some softness in capital. So, I think probably the most telling numbers will be what happens in the next three months. I don't want to project it but, I think this is probably - that has to be somewhat higher than I think our ongoing rate is going to be for the rest of the year, just because I know there is some weakness going on in capital.

CMN earned .20 last quarter.  This quarter, there are 2 analyst estimates, one at .16 and the other at .21, giving a "consensus" of .19.  The analyst at .16 maintains that management is confused why the other guy is at .21.  I think this dynamic, in combination with the clear conservatism in the above statement and the spectacular misses of any companies selling capital equipment into the healthcare space, means that the next quarter has real risk to the downside.

In addition, there has been insider selling, the company has some debt (plus some earn-outs still to be paid), backlog dropped year-over-year in September, and the valuation is over 20x eps on too-high "street" estimates.


earnings disappointment in early march

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