Purchased shares in early December 2014 around $7.20 per share (added to my position at higher prices several times). Symmetry Surgical (SSRG) began trading on 12/5 after being separated from Symmetry Medical (SMA). This was a very unique spin-off in that the stub piece was actually being acquired by private equity thus fixing one side of the equation. SMA announced in August that it would sell its OEM Solutions business to Tecomet for $450m or $7.50 per share to shareholders while simultaneously spinning off the much smaller surgical business into a new publicly-traded company.
As of 12/5/14, the transactions have closed and following the 1-for-4 spin-off, the current valuation picture looks like this:
Symmetry Surgical markets and distributes medical devices used in the general surgery market. These include reusable surgical instruments such as calipers, forceps, scalpels, etc.; sterilization devices such as trays and racks; and consumable and reusable electro-surgical tools. Management believes that Symmetry has an 8-9% share in the roughly $1bn reusable general surgical instruments market (fourth largest player).
The surgical instruments business was built through a series of acquisitions: Codman & Shurtleff (a division of Johnson & Johnson (JNJ)) in 2011 for $165m, Olsen Medical in 2011 for $11m, and Specialty Surgical Instrumentation in 2007 for $15m. You’ll notice this amounts to ~$190m while the current market cap stands at $70m. Not exactly wealth creating transactions. Management has admitted they felt the JNJ brand would justify the price paid for C&S when in fact they realized some fairly significant declines in business. Most of that impact has flushed through and growth is expected to resume in 2015.
Here is a snapshot of historical financial performance from the most recent proxy statement:
While the revenue declines at SSRG may seem concerning, the pace has slowed considerably year-to-date and is geared to resume growing. In fact, 4Q14 will be the first quarter to lapse the heavy year-over-year revenue declines from the C&S acquisition:
While the above charts may look like poor fundamentals on the surface, they actually show improving profitability and a stabilizing top-line. The focus going forward should center on smaller acquisitions which have performed well for Symmetry (Olsen & SSI).
The $18bn general surgery market is projected to grow 1-4% annually and management anticipates organic growth of 4-6% with added market share gains. Couple this with the capacity for adding acquisitions and the company could have a decent growth trajectory going forward. Lastly, CEO Tom Sullivan has laid out goals of $250m in sales through organic growth + acquisitions and 50% gross margins. This will likely take 4-5 years minimum to accomplish.
The primary competitors in the reusable general surgical instruments industry are small divisions within larger medical device companies CareFusion and Integra LifeSciences which makes a relative valuation somewhat difficult.
My approach to valuation is generally rather heuristic. Here are a few approaches I took with regard to Symmetry:
Revenue is averaging roughly $20.5m per quarter in 2014. At that pace full-year revenue would be $82m. Few medical device companies trade below 1x EV/sales; at that level SSRG would be worth about $8.75 per share today. Should management hit the targeted $250m in sales over the next 4-5 years that would put the stock at $26 per share at that time.
The free cash flow number above is a bit misleading as it reflects some working capital inflows and tax benefits from write-offs. However, this is still a great cash flowing business. Net income + D&A was $7.1m during the past six months and $18.3m during the trailing period. As intangible amortization will run over $5.3m per year through 2019, let’s assume EBITDA is a decent proxy for operating cash flow (no debt and minimal taxes). It’s not unrealistic to think Symmetry can generate $12m in 2015 EBITDA (5% sales growth at 14% margins). This is not a capital intensive business and I assume last year’s $1.5m in capex is a good proxy going forward. This would net $10.5m in 2015 FCF or $1.10 per share. At 10x, the stock would be worth $11 per share.
My worst case scenario would see revenue declines continuing and a failure to achieve margin expansion. Say 2014E revenue of $82m declines 5% to $78m in 2015 and operating margins are 3% for $2.3m in EBIT. Add back $6.3m in D&A and EBITDA is $8.6m. A debt-free healthcare company shouldn’t be worth much less than 6.5x EBITDA which would put the stock at about $5.95 per share. (Although in that scenario I would still argue you could pick this business up at less than 8x EBITDA; invert!)
At the end of the day, Symmetry is an unlevered medical device business with good cash flows and an attractive valuation. Less important in this situation is trying to figure out the right multiple for this company. If management can make a few decent moves and accomplish even half of what they are targeting, then this could turn into a wonderful investment.