Description

Electromed is a microcap med tech company that has been written up before.  They sell a high frequency chest wall oscillation (HFCWO) vest that is used to assist patients with lung disease.  The initial use case was cystic fibrosis, but now the bulk of use is in bronchiectasis from COPD.  Prior posts contain adequate background material, so I will not repeat.

1) Activist investor recently added to the board.  Long time shareholder Summers Value Partners went activist on the company last year after frustration with business and stock performance.  They agreed to a one year standstill and the formation of a board committee to review options.  After a year there was no movement and presumably the activist was planning another run at the company.  Instead, he has joined the board and also the board committee reviewing options.

2) It remains the only pure play independent player in the category.  They are the #3 player with a mid-teens market share and 70%+ gross margins.  While small ($40M in revenues) they are actually a profitable public company.  However, given the modest growth rates (low double digits) and modest margins from small scale (~10% EBITDA margins), the logical conclusion for this company is to be acquired and become a product line of a larger entity.  

3) Trading at a value multiple.  $40M+ revenues leaves the stock at ~1.8x revenues with 70%+ gross margins and double digit growth.  Moreover, it has >$20M in A/Rs that takes the EV/sales to <1.4x.  However, it operates at a measly 10% EBITDA margin because it is subscale.  An acquirer could expect a 30% contribution margin ($12M) and is seeing this thing trade at 5-6x.  

4) Multiple competitors have been acquired in the recent past.  Takeout multiple in the 4x revs range would seem reasonable and offer 100% upside from here.

5) Absent a takeout the company could also right size is operations and play for profitability.  Perhaps they could achieve 20% operating margins and monetize the excess capital on the balance sheet.  That would still mean the stock is trading for ~7x EBITDA.  It would seem reasonable to expect the multiple to expand and the stock to be up 30%.

It's an illiquid PA event trade.  I'd bet there will be some movement in the next one year and the stock could be up 30-100%.

Catalyst

Corporate change following activist joining the board.