LeMaitre Vascular: Steady As She Goes (NASDAQ:LMAT)

In the summer of 2020 I believed that LeMaitre Vascular (NASDAQ:LMAT) looked fair after a big pullback. The steady growth profile of the business and an interesting deal at the time made me interested to the shares which traded in their mid-twenties at the time. Ever since then shares have been on a roller coaster ride, gaining some 150% in the year which followed, after which shares have seen a retreat to current levels which look largely fair.

The Business

LeMaitre provides innovative products which allow surgeons to improve procedure efficiently, resulting in better patient outcomes, quicker recovery times as well as increased cost efficiency. A diverse product line has resulted in steady growth as the company has proven to be a real value creator.

The company is relatively small and in a steady fashion grew sales to nearly $120 million in 2019, ahead of the pandemic. Just like many medtech names, the company is solidly profitable, as it posted operating earnings of $21 million, resulting in margins which approach the 20% mark. This worked down to earnings of $0.88 per share which combined with a $25 share price in the summer of 2020, and factoring in net cash of $1.50 per share, I saw fair value at 25 times earnings, that is for an unleveraged business. This and a 4 times sales multiple made me compelled with revenue growth steadily coming in around the double-digit figures.

Of course, it was the pandemic which cast some doubt on the 2020 guidance, which called for decent growth, as the company announced a $90 million deal for Artegraft in the summer that year, a substantial deal with the own business valued just shy of half a billion. This company should add $15 million in sales, revealing a 5.7 times sales multiple was paid (including earn-outs), although it grows at a decent clip as well, adding some size and a few pennies in terms of earnings per share accretion.

Amidst all the moving parts, I concluded to start nibbling in the low twenties, with the entire market in disarray at the time, as I initiated a small position at $24, but nothing more than a watch function.

And Now?

The setback in the summer of 2020 marked the lows of the shares as revenues for the year rose 10% to $129 million, with growth accelerating towards the end of the year with the pandemic fading a bit and Artegraft making its contribution. Operating profits rose to more than $28 million, albeit that the run rate in the fourth quarter was quite a bit higher of course, as net debt has been very modest with the Artegraft deal resulting in quick deleveraging.

Shares rallied to their sixties in a massive momentum rally in the summer of 2021 as the company actually sold a million shares in the mid-fifties, to further bolster its balance sheet. Fast forwarding to early 2022, the company posted its 2021 results with revenues up nearly a fifth to $154 million as operating profits improved further to $36 million. Despite the million shares being issued over the summer, net earnings of $27 million translated into decent earnings per share growth, as they rose from $1.04 to $1.25 per share. The retained earnings and the share issue made that net cash has risen to $70 million, equal to nearly $3.50 per share.

A peak valuation at $65 last summer worked down to a roughly $1.3 billion valuation at the time, pushing up valuations in a huge way to about 8-9 times sales and around 50 times earnings. Since the summer, shares have retreated to the $46 mark, and if we factor in net cash, I peg operating asset valuations at around $42 per share. This results in a 33 times earnings multiple for the unleveraged business and part of this retreat comes as the outlook for the current year is less convincing. After all, sales are set to rise in a modest fashion to a midpoint of $164 million, as earnings are seen around $1.40 per share, resulting in a 30 times forward earnings multiple.

With a nearly $900 million enterprise valuation, forward multiples have come down a bit, but they remain steep in a rapidly rising interest rate environment, as I consider LeMaitre now trading in their large fair value range.

Final Thoughts

Truth be told, shares of LeMaitre have quite a ride behind themselves. Between the summer of 2020 and 2021, shares rallied 150%, arguably moving from undervalued territory to more than fully valued territory, after which shares have sold off some 30%. This move, combined with continuation of growth, has resulted in a much more reasonable valuation here.

Right now I consider shares to be fairly valued, yet the strong balance sheet and continued organic growth sets the company up for more dealmaking going ahead, as LeMaitre continues to build on its long term track record, with valuations arguably looking fair here.