ABMD thoughts

I’m starting to give this one a close look. Some initial questions that I will ask myself before taking a deep look are…

  1. Tax benefit from deferred losses in previous periods increased recent earnings. There were probably benefits in other quarters, not just the most recent quarter. I think Saul adjust the recent quarter downward, but did he adjust the other quarters too to arrive at his $1.08 in TTM adjusted earnings. If no and if there were additional previous tax gains figured into the prior 3 quarters as well then the P/E would be even higher than 69. Sixty-nine is already very high and an even higher P/E would give me pause.

  2. In looking at the most recent balance sheet there seems to be an additional $35M in unused deferred taxes. This would be applied for the next 2-3 quarters but after that the tax rate will be higher.

  3. Recurring revenue. I’m not clear how much of their revenue comes from one-time instrument sales and how much comes from disposable consumables that are used on a per procedure basis. I will want to see a significant amount of recurring revenue to remain interested in this company as an investment.

Chris

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1) Tax benefit from deferred losses in previous periods increased recent earnings. There were probably benefits in other quarters, not just the most recent quarter. I think Saul adjust the recent quarter downward, but did he adjust the other quarters too to arrive at his $1.08 in TTM adjusted earnings. If no and if there were additional previous tax gains figured into the prior 3 quarters as well then the P/E would be even higher than 69. Sixty-nine is already very high and an even higher P/E would give me pause.

Hi Chris, I have to admit it’s lazy, but I used the actual money they made, which isn’t so silly if you think about it, as that IS the money that they made, and put in the bank.

2) In looking at the most recent balance sheet there seems to be an additional $35M in unused deferred taxes. This would be applied for the next 2-3 quarters but after that the tax rate will be higher.

True.

3) Recurring revenue. I’m not clear how much of their revenue comes from one-time instrument sales and how much comes from disposable consumables that are used on a per procedure basis. I will want to see a significant amount of recurring revenue to remain interested in this company as an investment.

Those little instruments are fairly tiny, and they are placed in patients for varying amount of time, but for hours at least, and sometimes for days. I am not sure, mind you, but I can’t imagine that they re-use them. I think they ARE recurring income. (I never did find a contact phone or email address for investor relations to ask them, but perhaps one of the two doctors who posted can answer that).

Saul

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I never did find a contact phone or email address for investor relations to ask them

Hey Saul, this was at the bottom of their most recent press release:

For further information please contact:

Ingrid Goldberg
Director, Investor Relations
978-646-1590
igoldberg@abiomed.com

I have a friend who is a doctor/entrepreneur. Another friend of mine (an engineer) installed a level 3 clean room in his basement (as unbelievable as it sounds) and they were working together to develop a stent that dissolved over time. Apparently there’s a problem with leaving them in, and there are often complications with removal. In any case, they are always single use. I have no idea whatever became of their project, I’ll have to ask the next time I talk to one of them.

I have to admit it’s lazy, but I used the actual money they made, which isn’t so silly if you think about it, as that IS the money that they made, and put in the bank.

Saul, my point was less about getting the earnings numbers precisely right and more about the very high P/E. Using your numbers, the P/E is 69. You must think that growth will be enormous. But the forward guidance midpoint on revenue is $290M for 2016 versus $230.3M for 2015. This is a 25.9% increase in revenue. Yes, the tax issue put money in the bank, but it’s it more important to get forward a strong forward adj EPS growth rate (on an apples to apples basis) particularly considering a P/E of 69? I’d like to see a minimum 150% adj EPS growth rate to justify paying for a P/E of 69. Do you think that $290M in revenue can generate $2.70 in 2016 adjusted EPS?

Chris

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Saul, my point was… more about the very high P/E. Using your numbers, the P/E is 69. You must think that growth will be enormous. But the forward guidance midpoint on revenue is $290M for 2016 versus $230.3M for 2015. This is a 25.9% increase in revenue. It’s more important to get forward a strong forward adj EPS growth rate particularly considering a P/E of 69? I’d like to see a minimum 150% adj EPS growth rate to justify paying for a P/E of 69. Do you think that $290M in revenue can generate $2.70 in 2016 adjusted EPS?

Chris,

Operating margin for the fiscal year ending March was 12.4%, up from 4.6% the year before!!!
Operating margin for the March quarter by itself was 18.3%, up from 7.3% !!!

While they are forecasting operating margins of 14% at the midpoint for the year ending March 2016, they should hit 18% (at least), for the next fiscal year, as they hit it for this March’s quarter and as they have more volume to spread out their costs. I imagine revenue forecasts will keep going up from the current 285 to 295 as well.

They have pretty much an all-consumables business. Can’t ask for a better model.

Best,

Saul

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Operating margin for the fiscal year ending March was 12.4%, up from 4.6% the year before!!!
Operating margin for the March quarter by itself was 18.3%, up from 7.3% !!!

While they are forecasting operating margins of 14% at the midpoint for the year ending March 2016, they should hit 18% (at least), for the next fiscal year, as they hit it for this March’s quarter and as they have more volume to spread out their costs. I imagine revenue forecasts will keep going up from the current 285 to 295 as well.

Saul,

OK so if you apply 18% on $295M revenue (high end of guidance) for FY2016 then you get operating income of $53.1M. They will probably dilute from 44M shares to 46M shares giving us $1.15 per share in income per share before taxes. In FY2016 they will pay a lower rate than what they will need to pay in FY2017 and beyond. I think we should model their longer term tax rate for EPS comparisons across periods. So if we assume a 30% effective tax rate then we get EPS of $0.805 for FY2016. The stock is at $75 which would give it a P/E of 93. Even if they were to grow EPS by 100% from 2016 to 2017, then the value wouldn’t be that compelling. Saul, you always pay close attention to value (adj EPS growth versus P/E). Are you ignoring value for ABMD or am I missing something here?

Chris

Chris, I may be making a total mistake on it. If you are uncomfortable with it, it’s best to pass. I only have a 5% position myself. I’m figuring for the current quarter that they should come in somewhere about 33 cents, up from 11 cents (as I figure it, which isn’t easy).
Best.

How realistic is their 20% revenue growth guidance ?

From Saul’s original link:
http://discussion.fool.com/abmd-a-new-try-out-stock-in-my-portfo…

2012: 37 39 37 38 = 151
2013: 44 43 44 46 = 177
2014: 50 49 52 62 = 213
2015: 68

Revenue growth was accelerating and was at 35% for last six months. The last six months adjusted earnings were up 160%, so earnings growth is accelerating too.

SKX analyst consensus was $1 and company said it was comfortable with it. They came up at $1.55. As long as the growth is accelerating results are far likely to surprise on the upside. As they are just starting out, my feeling is acceleration will continue for a while.

Of course this may turn out to be too optimistic. No way to surely predict, but to watch and act on it.

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I may be making a total mistake on it.

The biggest red flag of all is that Schwab has a “B” rating on it. Anything above a “C” should be considered untouchable! :wink:

Chris

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Hi Chris, In a string of posts about ABMD that we batted back and forth, you seemed pained and perplexed that I was investing in it when it didn’t seem like a good “Saul” choice to you. You kept wondering what I was seeing that you weren’t…I tried on several occasions to explain my reasons for liking it, and admitted on a couple of occasions that it could be a mistake. Now that it’s up another eight or nine dollars today to almost $110, I was tempted to revisit our discussion and figure our what it WAS that I was seeing and you weren’t. First of all, I does seem high to me at $110, and I wonder if it’s at least in part a short squeeze. As I mentioned to someone, I didn’t like the shouting kind of press release they sent out, which sounded like tooting their own horn too much, but they are trying to encourage awareness. And I did just reduce my position by 20% (but kept 80% of the position).

As for my reasons, I wrote at one point

Basically the story is that they just got FDA approval for a large expansion in their patient population and at the same time a DOJ investigation of their labeling was dropped with no sanctions on them at all. They feel this gives them the green light to go out and become standard of care and they are on their way. They have reacted by expanding their manufacturing to try to keep up with demand and anticipated demand. Meanwhile in the last two quarters, revenue growth, which had been perhaps 12-17%, has expanded to 35% and 36% (which is a lot of revenue growth), and in those two quarters earnings growth has been 180% and 140%. Gross margins are over 80%. Operating margins for the fiscal year ending in Mar almost tripled from the year before. I’m sure they will handily beat revenue estimates for the year ending in Mar 2016. And they have an all consumables business. I’m happy with it. I don’t think at all that the stock is a " bargain" but it think it is a decent value and it will grow into its price. It’s not one of these companies that say, sorry we have no earnings growth but we are plowing it all into the company. They ARE growing quite rapidly, earnings, margins and revenue, all three.

So the best guess that I can come up with that explains what I was seeing, is that I looked at a whole bunch of factors that all said buy, and you seemed to be held back by certain specific metrics. It’s kind of walking around the issue in a way, but maybe we’d have to say that it was intuition on my part. I felt that there was a lot to like.

Hope that this helps, and I wonder do you see it the same or differently?

Saul

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In a string of posts about ABMD that we batted back and forth, you seemed pained and perplexed that I was investing in it when it didn’t seem like a good “Saul” choice to you. You kept wondering what I was seeing that you weren’t

Saul,

I was not pained. I spent a lot of time analyzing this company. I also asked 2 of my good friends talk to their heart surgeon and cardiologist friends to get more information. Which they did. Yes, I asked you if you could explain why you invested since it was very clear it was not a Saul stock. My primary reason and the only reason that kept me from also investing was the company valuation (i.e. the P/E was something like 65 or 70 when the stock was at around $77 if I recall correctly). And my calculations for next year’s earnings didn’t justify this valuation. And your own predictions of next year’s earnings didn’t help because it wasn’t high enough. What I was perplexed by was your inability to articulate your reason for purchasing. I mean no disrespect toward you here. What I remember is you saying that you might be wrong about this one and that you were only putting in 5% and if you lost money on it “so what?” (I’m paraphrasing). It is more important to you to be right on your big holdings. Yes, this answer really perplexed me because it seemed so out of the ordinary for you. Usually, you make such solid, well thought out investing decisions based on facts and calculations, and this, in my view, made little sense especially when part of the justification was “if I lose 1-2% of my portfolio value it doesn’t really matter because I’m up so much this year” (I am paraphrasing again and this was my impression). I see in your last post you repasted some of your past justification, but none of that convinced me because it didn’t address my concern about P/E and my view of the future earnings numbers. It just didn’t make sense to me mathematically. Well, so far it turns out that you have done very well. I mean ~30% up in less than a month. Wow! Nice. I am very happy that you’ve made a return.

Hope that this helps, and I wonder do you see it the same or differently?

Well, now the stock is up $30 more. Yes, the guidance has changed. So I have to say that I see it the same. Sort of. Based on my previous calculations, I would have only invested if I thought that ABMD could blow away their guidance. By a lot. If you had said, well, I know they are expensive but I believe that they won’t hit $290M but more like $390M then you and I could have had a discussion about why or why not $390M is more reasonable than $290M. I think the new guidance is now up from $290M to $310M. I can not really have a productive discussion with you if your reason is based on largely nebulous intuition. So my view is only a little different because now there’s a steeper revenue acceleration. But I still see them as very expensive. In order to be invested in this company, I’d have to believe that revenue needs to hit much higher levels in the coming periods. I would need to believe that their current guidance needs to be blown away again. I’d also have to believe that the $20M that they are investing to in upping their manufacturing capacity is a one-time CapEx event and not something that is going to be repeated every year.

Anyway, as I said, I’m glad you’ve earned a great return so far. I’d add that I really respect your opinion and I actually enjoy it when you and I sometimes have different views on companies. It leads to learning. We see the big allocation stocks the same right now, but we differ on a few such as ABMD, SEDG, SCTY.

Chris

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Chris, I have to confess that I have some of the same questions since it seems that the PE is sufficiently stratospheric that there is a whole lot of expectation built in and, while current growth has been very good, it isn’t clear how long that growth can continue without new products which don’t yet exist. Once upon a time, I would have been tempted based on the momentum and story, but it seemed to me that the above considerations meant one would have to watch it like a hawk in case of a stumble.

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In order to be invested in this company, I’d have to believe that revenue needs to hit much higher levels in the coming periods. I would need to believe that their current guidance needs to be blown away again.

Chris:

You have presented a very reasoned argument for why ABMD should be valued lower than its present market cap. It is very logical in a very illogical stock market and that is the very reason that we have opportunities. Rarely does it seem that a stock prices logically.

That is the leverage that we use to go long or short a stock.

I know you already know all this but I guess I am just pointing out that these early technology stocks are more commonly characterized by hype…and that causes the big run…until disillusionment.

In the case of ABMD, when Saul mentioned it, the TA was quite positive as well, and it has been a great stock to trade on momentum.

But longer term???..not exactly a under the mattress type investment obviously.

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I agree with Saul on ABMD because it came through one of my screens, which demand certain features in a company without which I am reluctant to make a purchase. It also came through the after-DD, albeit with reservations.

It is true there is short history of margins, growth is difficult to judge, PS is a hideous 17 and there is a 10% short position. These are a bit daunting. However, I note that growth, OM, ROIC and FCFM nevertheless seem to indicate both strength and value. I have insider-ownership at 7%.

I have a good-sized holding equal to its attractions.

On the medical side, I also hold AGN BDX CBM CVS EW GILD UK:SN. and UK:SHP as well as ETFs PJP IBB and VHT.

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What I remember is you saying that you might be wrong about this one and that you were only putting in 5%… and it is most important to you to be right on your big holdings.

Chris, I wasn’t trying to be flip. I simply couldn’t rebut all your arguments (although I thought that basing on the mid-point of the early revenue estimates was way overly conservative). I thought you were also figuring as if the current products were all they would ever have and that they wouldn’t develop any new ones. I thought you were ignoring the fact that many people who wouldn’t try the products because of a DOJ investigation might now try it, and that the product would go mainstream. I just liked the company for the reasons I just enumerated in my previous post. I couldn’t explain it all. I really am not right all the time. I do agree that the current price is high, and I did sell 20% of my position, but I’m not selling the rest, and I’m not going to try to trade in and out.

I’d also have to believe that the $20M that they are investing to in upping their manufacturing capacity is a one-time CapEx event and not something that is going to be repeated every year.

I’d love them to have enough new business that they have to keep adding manufacturing capacity.

Chris, It’s odd that we differ so on this one, as we agree on so many stocks and I always do value your analyses as they are well thought out and rely on the same kind of thinking as mine. I guess I’m just off on a different track on this one.

Best,

Saul

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