Globus Medical Stock: A Long-Term Investment (NYSE:GMED)

Globus Medical (NYSE:GMED) is a medium-growth medical technology company. The company’s top-line and bottom-line are expected to expand in a significant manner in the next three to five years driven by its technologically advanced orthopedic and spine-care solutions. As a result, I expect the company’s revenue will grow at a CAGR of around 10% in the long term, driving its share price up to a significant extent. Long-term growth-oriented investors can buy the company’s shares around the current price for maximizing profit.

Globus Medical is a medical device company which develops compelling solutions for patients with musculoskeletal disorders. The company is an engineering-driven manufacturer of highly advanced robotics and imaging solutions in the area of orthopedic and spine surgeries. The company’s solutions are delivered primarily to hospitals, ambulatory surgery centers and physicians for advancement of patient care with improved efficiency at lower cost.

Growth Drivers

INR Products and ExcelsiusGPS Robotics Platform

Globus Medical’s primary growth driver is its orthopedic appliance solutions, which comprises of the company’s imaging, navigation and robotics (INR) products. Using these products, spine surgeons can perform less-invasive spine and orthopedic surgeries in ways which are less complex and more efficient from clinical and operational angles. The products help surgeons become more productive because surgeries using these products are easier compared to traditional ways. These are the reasons why these products perform better in competitive environment.

The company’s ExcelsiusGPS robotics platform helps surgeons improve accuracy and optimize patient care in a better way compared to competitor products in performing simple to minimally invasive TLIFs, large open scoliosis reconstructions, and vertebral column resections. TLIF stands for Transforaminal Lumbar Interbody Fusion. The robotics platform offers surgeons technological advanced ways to place pedicle screws and interbody spacers. Technologically advanced ways, as just mentioned, leads to better patient outcomes compared to competitor technologies.

GMED’s INR and ExcelsiusGPS solutions help the company grow revenue in a sustainable way driven by outcompeting nearest technologies.

Musculoskeletal Solutions

GMED’s musculoskeletal solutions make its another growth driver. The solutions include implantable devices, biologics, accessories, and several surgical instruments which are used in spinal, orthopedic and neurosurgical procedures. The company pioneered innovative expandable solutions for interbody fusion, corpectomy and interspinous fixation which can be customized according to the patient’s anatomy, eliminating sequential trialing and potentially saving surgical time. This is the reason why the company’s musculoskeletal solutions perform well in competitive environment with growing market share. In the long term, these solutions will help the company grow revenue that I expect to continue for a long time.

Competition

GMED operates its business in a highly competitive environment. The company’s competitors include Medtronic (MDT), Johnson & Johnson (JNJ) owned DePuy Synthes, Stryker Corporation (SYK), Zimmer Biomet Holdings (ZBH), Smith & Nephew (SNN), NuVasive (NUVA), and Orthofix Medical (OFIX). GMED competes with its competitors on the basis of quality of product, innovation capabilities, and after sales service.

The company’s primary competitive advantage is that its Enabling Technologies platform offers surgeons advanced computer-assisted intelligent systems designed to enhance a surgeon’s capabilities. As a result, patient care can be achieved in an advanced way, which leads to expanded long-term revenue growth for the company. The company’s another competitive advantage is that it has a highly productive product development team. The team consists of engineers, researchers and machinists who collaborate with surgeons during development of a product, as a result of which a technologically advanced product gets invented. In addition, the product gets developed quickly, from product conception to launch, which in turn helps the company generate revenue with strong growth opportunities.

Third Quarter 2022 Results

GMED’s third quarter 2022 worldwide net revenue came in at $254.1 million, an increase of 10.6% year-over-year on a reported basis, and an increase of 12.6% year-over-year on a constant currency basis. GAAP net income for the quarter came in at $47.4 million, an increase of 0.5% year-over-year. Diluted EPS for the quarter was $0.47, compared to $0.45 for the third quarter of 2021, which remains almost flat.

The company delivered okay results for the third quarter of 2022. Revenue increased driven by strong spine business as well as market share gain in the US. Revenue expansion also happened driven by the company’s continued robotic system demand and fresh demand for its Excelsius3D imaging system. Bottom-line remained okay due to stringent cost control measures. I expect the company will be able to deliver significant net income growth in the next three years as there is significant revenue expansion scope driven by international expansion, particularly in the Asia Pacific region, with cost remaining disciplined as its products can be manufactured with great cost-efficiency. As a result, the company could start offering shareholders dividends, with significant dividend growth opportunities in the longer term.

GMED’s robot-assisted procedures has strong demand in the orthopedic surgery marketplace. The company’s robot-assisted offerings continued to accelerate in the third quarter and grew 48% year-over-year. In addition, the company’s Excelsius3D Imaging System rollout is continuing to penetrate the orthopedic surgery marketplace. I expect the company’s robotic systems coupled with its imaging systems will completely change the way orthopedic surgery is done today. The company’s robot-assisted surgeries (with the help of its advanced imaging systems) require small incisions. In addition, such surgeries lead to less tissue damage compared to surgeries done in traditional ways. These are the reasons why GMED’s robot-assisted procedures will see higher adoption rate in the coming months and years, and boost the company’s long-term revenue growth.

Valuation

The company’s peer group companies include Medtronic, Johnson & Johnson, Stryker Corporation, Zimmer Biomet Holdings, and NuVasive.

	GMED	MDT	JNJ	SYK	ZBH	NUVA
P/E Non-GAAP (FY1)	36.39	15.33	17.93	27.50	18.81	20.62
Price/Sales (TTM)	7.47	3.51	4.93	5.32	3.40	1.84
Price/Cash Flow (TTM)	38.70	17.12	21.83	36.46	17.45	13.84

Click to enlarge

(Data Source: Seeking Alpha)

GMED is expensively valued compared to its peer group companies. The company has a debt-free balance sheet consisting of cash and equivalents of $134.2 million. The company is expensively valued since it makes orthopedic surgery solutions which are not only technologically advanced, but also easy-to-use with strong adoption going on. Since the company’s robotics and imaging solutions are futuristic, and these solutions are expected to be strongly adopted in the years to come, coupled with strong capital market activities unfolding in the global economy, the company’s shares can be purchased around the current price.

In the past five years, Globus Medical’s revenue has grown at a CAGR of 9.44%. Assuming the company’s revenue will grow around the same rate in the next five years, I will find out the company’s long-term (five-year) share price. The company’s trailing 12-month revenue is $998.4 million, and at a CAGR of 9.44% the company’s beginning-2028 revenue will be $1,567.50 million, or $15.70 per share. In the last five years, the company’s shares have traded between the price to sales multiples of 4.50x and 9.50x. I expect the company’s price to sales multiple will touch a high of around 8x in the next five years driven by strong sales of its technologically advanced orthopedic appliances which, I expect, will have robust long-term (beyond five-year) demand. Applying a price to sales multiple of 8x on the company’s beginning-2028 revenue per share, I get the company’s beginning-2028 share price as $125.60.

Risks

Patients with musculoskeletal disorders suffer from fracture and damage of bones. Treating these conditions in traditional ways may lead to worsening of the ailments. However, if patients are treated using GMED’s appliances under the guidance of the company’s robotic and imaging solutions, patients witness quick recovery with less hospital stay. If the company doesn’t improve its appliances, such as pedicle screws and fixation plates in terms of materials used in these products, it may face competitive pressure. The company should also enhance the versatility of its robotic and imaging platforms in order to retain its leadership position in the space it operates its business. If the company fails to ensure these factors, its revenue growth and profitability could be negatively impacted.

For GMED to be successful to become a leader in the space to treat musculoskeletal disorders, the company must convince surgeons and hospitals that its products are attractive alternatives to competing products for use in orthopedic procedures. If the company fails to do so, its revenue growth and profitability could be negatively impacted, which in turn could result in lowering share price for the company.

Conclusion

GMED’s competitive edge in terms of offering surgeons and hospitals advanced technologies to effectively treat patients suffering from musculoskeletal disorders leads to long-term revenue growth of the company. In order to stay ahead of competitors, GMED remains committed to discover new technologies to treat such patients. The company’s shares can be bought around the current price as long-term investment.