Description
Electromed (ELMD)
Electromed is a debt-free ($16.2 million cash on hand) micro-cap medical device company. It trades roughly $700k per day so this idea is meant for smaller accounts.
As a device company, ELMD has a large addressable market, is growing both revenue and profitability and has 2 shareholder activists involved.
Business Description
ELMD is a medical device company that develops, manufactures, markets and sells innovative High Frequency Chest Wall Oscillation (HFCWO) airway clearance products, primarily for use in the home setting. Their flagship product, the SmartVest® Airway Clearance System, is a differentiated device designed for patient comfort and ease of use. According to ELMD, the domestic market for HFCWO devices is largely untapped, with fewer than 15% of the approximately 824,000 patients diagnosed with bronchiectasis in the US currently using this non-invasive therapy.
The company employs an efficient direct-to-patient and provider model, through which they obtain patient referrals directly from clinicians, and take the administrative burden off patients and providers by managing the entire insurance claim, product delivery, and training processes on their behalf.
The main product (SmartVest® Airway Clearance System) consists of a generator that delivers repeating pulses of air through a single hose to an inflated wearable vest. Each pulse gently squeezes and releases the chest to thin and loosen mucus in the lungs. Mucus is propelled upward toward major airways where it can be coughed out more easily.
Their investor presentation more details on how their product works and can be found on their website.
Financial Highlights
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($ millions)
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FY 2021
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FY 2022
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FY 2023
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FY 2024
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CAGR
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Sales
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$35.80
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$41.70
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$48.10
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$54.70
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15%
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Net Income
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$2.40
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$2.30
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$3.20
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$5.20
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29%
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ELMD has grown sales at a 15% CAGR as it has expanded its market from cystic fibrosis to the larger market of bronchiectasis from COPD.
Given ELMD’s small revenue, sales, marketing and G&A expenses consume a large part of the sales revenue generated. As the company grows it sales numbers, they should be able to get operating leverage over time, which is a key focus for the CEO.
Competition
The competition is dominated by larger players. Each of the players in the chart below were acquired over the last 7 years except for Electromed. The company believes that it may be gaining market share at the expense of Hill-Rom. The market is also growing in that the original use case for these vests was cystic fibrosis but now includes bronchiectasis in patients with COPD.
Valuation
Take-out multiples
Below are some takeover precedents. Hillrom was a larger, more diversified company. However, the other two players are more comparable.
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Date
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Target
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Acquirer
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EV/Sales
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Dec-21
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Hillrom
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Baxter
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4x
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Sep-21
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Afflovest
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Tactile Medical
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5.3x
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May-17
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RespirTech
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Royal Philips
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3x
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If we use 3x EV/Sales, ELMD would today be worth around $18.23 (a 9% increase) and using 5x EV/Sales, ELMD would be worth $30.38 (an 82% increase).
Stand-Alone Valuation
ELMD believes that it can grow sales from mid to high teens in the next few years. Let’s assume that means 15% and they can achieve that over the next two years. Based on today’s sales, that would mean about $72 million two years from now. ELMD currently trades at 2.45 EV/Sales today and assuming the multiple stays the same, but the sales grow to $72 million, the stock could be worth $19.60 (an 18% increase over two years).
The real play is the takeover of the company assuming the sales growth can be achieved. If we use a 4x EV/Sales multiple with $72 million in sales two years out, the stock could be worth $32 (essentially a double from here assuming a takeout). ELMD has consistently reported gross margins over 70% which makes it an ideal acquisition candidate for a larger company as the G&A costs can be eliminated.
Activist Shareholders
There are two activist shareholders involved:
- Andrew Summers (6.3% owner) and
- Bradley Radoff (7.2% owner)
Andrew Summers serves on the ELMD board of directors. Given the fact that both of these activist shareholders own a significant percentage of ELMD, shareholder value should be an important consideration for management and the board.
Management
A new CEO, Jim Cunniff, was hired in 2023 and he has put a significant focus on growing profitability in addition to sales. He recently purchased an additional small amount of stock in March 2024 for $15.25.
Risks
The key risk is that this is a micro-cap medical device company with one product.
Catalyst
- Continued sales and profitability growth
- Eventual takeover of the company
I hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- Continued sales and profitability growth
- Eventual takeover of the company