Dr_Microbe
In terms of investor sentiment, it’s basically back to square one for AngioDynamics (NASDAQ:ANGO) after a fiscal first quarter where the reported numbers weren’t quite that awful, but where management commentary on several subjects cast a pall over the company’s near-term prospects.
The shares are down more than a third since my last update on the company, lagging Cardiovascular Systems (CSII) and Inari (NARI) by a wide margin, and lagging Penumbra (PEN) by an exceptionally large margin. It’s difficult to recommend the shares here, as value stories in small-cap med-tech don’t often work out well and many of the issues pressuring sentiment won’t resolve quickly. I do think today’s price undervalues the business as a going concern, but I don’t see a high likelihood of M&A interest and the company’s combination of sub-10% revenue growth and single-digit adjusted EBITDA margin is far from compelling.
Challenges That Seem Out Of Step With The Broader Space
Having covered multiple earnings reports from med-tech companies over the past couple of months, a lot of what AngioDynamics had to say about the challenges facing the company struck me as a little unusual.
Underlying Growth
The general trend across the space has been an ongoing recovery in procedure volumes, with most companies claiming that procedures are back to around 95% of pre-pandemic levels, albeit with some meaningful company-by-company and sector-by-sector variation. Perhaps not surprisingly, hospitals have been prioritizing procedures that make them the most money, so cath labs and electrophysiology labs have been busy, while more resource-intensive procedures (particularly in terms of skilled staffing) have recovered more slowly.
To that end, management blamed staffing challenges for the 9% growth in AngioVac revenue during the quarter. While it’s true that AngioVac procedures are more complicated and it’s not completely fair to suggest an apples-to-apples comparison with the vascular products from Penumbra and Inari, the reality is that those two companies posted 19% and 32% growth, respectively.
Likewise, the 1% overall decline in Medical Device sales, including an 8% decline in Venous, declines across the Access business, and declines in most of Oncology, was out of step with what many other companies said about the quarter. BD (BDX) reported about 5% organic growth in its Peripheral Intervention segment, and while Teleflex (TFX) did see 1% erosion in the Vascular Access business, that was still considerably better than AngioDynamics.
Margins
AngioDynamics reported a 20bp yoy and 150bp qoq decline in gross margin. Although that wasn’t all that bad, management talked about worsening supply-chain problems, with some suppliers extending lead-times out to as much as a year. In response, management is taking on more inventory to make sure they can meet expected demand without further disruption.
Again, this is a more serious comment than I’ve seen from other companies. While some companies have said that they’re still facing ongoing supply chain challenges, I can’t immediately think of another company that reported conditions that were still getting worse.
Customer Behavior
Last and not least, AngioDynamics spoke to worsening receivables trends. Management said that they were seeing hospitals and other customers pushing out payments, and that they were extending more flexible payment terms to accommodate these customers.
Again, I can’t recall another company calling out issues getting paid on time by hospitals or other healthcare customers, but while Penumbra did see a greater than five-day improvement in its days receivables outstanding, Inari and Cardiovascular Systems both saw double-digit increases (more than 11 and 14, respectively), while AngioDynamics saw close to a 21-day increase.
Waiting For The Growth Opportunities To Develop
The main story at AngioDynamics hasn’t really changed – the company is looking to harvest cash flows from its minimal-growth legacy Medical Devices business while ramping up its Medical Technologies businesses like AngioVac/AlphaVac, Auryon, and NanoKnife.
AngioVac and AlphaVac both represent credible growth opportunities as the company uses clinical trials to expand the labeling indications for the platform and address larger market opportunities like ilio-femoral deep vein thrombosis and pulmonary embolisms, while also taking advantage of an overall move away from pharmaceutical interventions toward mechanical interventions. Penumbra and Inari are further along this process, though, and AngioDynamics will have to invest in both R&D and sales to drive this opportunity.
Likewise with Auryon in peripheral atherectomy and NanoKnife in cancer, with the former needing sales support and the latter needing pivotal clinical data to support broader labeling and use.
Addressing the Medical Devices business again, the company lost a recent patent court case with BD involving its port products. Damages have not yet been determined and AngioDynamics intends to appeal, but any meaningful penalties could have a disproportionate impact given that the balance sheet is already under some pressure from increased working capital needs (growing inventory and receivables).
The Outlook
It may seem odd relative to the share price reaction, but management hasn’t changed its financial guidance at this point. The company is still guiding for 8% to 10% revenue growth, gross margin of 52.5% to 54.5% (versus 51.9% in the fiscal first quarter), and adjusted EPS of $0.01 to $0.06. Perhaps not surprisingly, though, the Street has taken a more conservative view, with the average sell-side revenue estimate now at the bottom of the range and the average EPS estimate now at ($0.01), with a range of ($0.06) to $0.01.
This is a more challenging modeling exercise for me now, as I don’t see a lot of corroborating evidence for AngioDynamics’ challenges with suppliers and customers, and so I don’t really know if this is a temporary issue of a couple of quarters or perhaps a more long-standing issue. I suspect it’s the former, but clearly the Street has taken a “shoot first, ask questions later” mentality.
I still believe that AngioDynamics can achieve long-term revenue growth on the high end of the mid-single-digits (around 6%) as faster-growing products like AngioVac, AlphaVac, Auryon, and NanoKnife offset slower-growing, if not eroding, legacy businesses. I likewise believe that larger revenue contributions from these technology-driven growth businesses and improved operating scale over time will drive better gross, EBITDA, and free cash flow margins. Over time, low double-digit FCF margins should be achievable, but I use the word “should” with some caution given that the long-term performance of AngioDynamics has been well short of that.
AngioDynamics does look undervalued on discounted cash flow, but there are legitimate questions as to whether the company can sustainably achieve double-digit FCF margins. If actual long-term performance is closer to “more of the same” (in line with historical averages), the shares aren’t even close to undervalued.
I have similar challenges when looking at multiples-based valuation. While 7% to 8% revenue growth over the next three to five years should be able to support a forward EV/revenue multiple of at least 3.0x, small-cap med-techs with less than 10% revenue growth often struggle to get even 2.0x multiples. Likewise with smaller med-techs with weak EBITDA margins; single-digit EBITDA margins are usually a non-starter for many institutional investors in the space – it’s acceptable to have negative margins if you’re growing revenue at a double-digit clip, but single-digit revenue growth and single-digit EBITDA margins are a problem.
The Bottom Line
Going negative on AngioDynamics shares at this point feels like locking the barn door not only after the horse has left, but after the roof has caved in as well. I do think there are real products here with real addressable markets, but clearly the Street has this name firmly in the doghouse and management will have to deliver on the revenue growth and margin leverage stories to get a meaningful rerating. That said, I’ve seen too many small med-techs with single-digit revenue growth and weak EBITDA margins struggle to gain traction, and I can’t really recommend this to readers without at least the warning that this could be a long and frustrating wait.
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