Merit Medical Systems Stock Is Up 2x But Has More To Go

Despite a solid 2x rise since the March 23 lows of this year, at the current price of around $50 per share we believe Merit Medical Systems stock (NASDAQ: MMSI), a company that manufactures disposable medical devices and surgical kits, has more room for growth in the near term. MMSI stock has rallied from $26 to $50 off the recent bottom compared to the S&P which moved 48% over the same period, with the resumption of economic activities as lockdowns are gradually lifted. Though gains have been strong over the recent months, MMSI stock is up just 17% from levels seen in early 2018, over two years ago.

Some of the 17% rise of the last 2 years is justified by the roughly 37% growth seen in Merit Medical Systems revenues from 2017 to 2019, while its revenue per share (RPS) grew 21% to $18.06 in 2019, compared to $14.91 in 2017. This can be attributed to a 13% uptick in total shares outstanding. Despite the growth in RPS, the company’s P/S Multiple saw a contraction. We believe the stock is likely to see upside despite the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 17% Change in Merit Medical Systems Stock between 2017 and now?‘, has the underlying numbers.

Merit Medical Systems’ P/S multiple changed from 2.9x in 2017 to 1.7x in 2019. While the company’s P/S is 2.8x now, there is a potential upside when the current P/S is compared to levels seen in the past years, P/S of 3.3x at the end of 2018.

So what’s the likely trigger and timing for upside?

The global spread of Coronavirus has meant that fewer people are visiting hospitals for non-emergency and non-Covid cases, which has led to a decline in demand for surgical kits and disposable medical devices, especially in Q2. That said, the company recently announced its Q3 results, which were much better than estimates, led by a rebound in procedures performed. Total revenue increased 0.4% y-o-y to $244 million, while the adjusted earnings of $0.42 per share reflect a 50% growth over the $0.28 figure reported in the prior year quarter. The US sales, which account for 60% of the company’s total sales, were still down 0.6% in Q3. With economies now gradually opening up, and the resumption of elective surgeries that were deferred earlier in the year due to Covid, will likely result in sales growth for Merit Medical Systems over the coming quarters, boding well for its stock.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. At levels of around $50, MMSI stock is trading at 2.9x its 2020 expected RPS of $17.22, and 2.7x its 2021 expected RPS of $18.73. This compares with P/S of 2.9x and 3.3x seen in 2017 and 2018 respectively, making the stock appear attractive for upside potential.

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