We think that Penumbra (NYSE: PEN), a medical devices company focused on interventional therapies, currently is a better pick compared to the Gap stock (NYSE: GPS), a specialty retailer selling casual apparel, accessories, and personal care products, despite it being the more expensive of the two, trading at 6.8x trailing revenues compared to 0.2x for Gap. The gap in the valuation of these two companies can be attributed to Penumbra’s superior revenue growth and better financial position, as discussed below. We compare these two companies due to their similar market capitalizations.
If we look at stock returns, Penumbra’s -45% change is comparatively better than the -67% return for Gap over the last twelve months. This compares with a -7% change in the broader S&P 500 index. Gap faced headwinds with supply chain issues weighing heavily on its stock performance over the recent quarters. An earnings miss by Penumbra earlier this year resulted in lower levels for its stock. The Jet 7 Xtra Flex catheter recall in late 2020 also impacted its business and stock performance in 2021.
1. Penumbra’s Revenue Growth Has Been Stronger Over The Recent Years
- Gap’s revenue growth of 53% over the last twelve months is better than the 32% for Penumbra.
- However, looking at a longer time frame, Penumbra’s sales grew at a much higher average growth rate of 19.6% to $0.7 billion in 2021, compared to $0.4 billion in 2018, while Gap saw its revenue grow at an average rate of 1.3% to $16.7 billion in 2021, compared to $16.6 billion in 2018.
- Penumbra’s vascular segment has been driving growth for the company. Its vascular thrombectomy and peripheral embolization medical devices continue to see higher market penetration. A recovery in total procedure volume in 2021 helped the segment sales grow a substantial 53% y-o-y.
- The company’s neuro segment has seen its sales expand by 16% in 2021, led by higher demand for neuro access, embolization, and thrombectomy medical devices. However, the recall of its Jet 7 Xtra Flex catheter adversely impacted the overall segment revenue growth.
- Looking forward, continued market penetration, a rise in procedures volume, and the company’s focus on new products will drive the revenue growth for Penumbra over the coming years.
- Gap faced headwinds with supply chain issues weighing heavily on its performance in 2021, primarily driven by longer transit times from the West Coast port delays and the sudden and prolonged closure of factories in Vietnam.
- Gap is now diversifying port exposure through Eastern and Southern ports, growing its Mexico and Central America sourcing in 2022 to increase manufacturing speed. It will also be divesting smaller non-strategic brands and shedding underperforming North American stores to strengthen its core business.
- Our Penumbra Revenue and Gap Revenue dashboards provide more insight into the companies’ sales.
- Penumbra’s revenue is expected to grow faster than Gap’s over the next three years. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 19.3% for Penumbra, compared to a 1.6% CAGR for Gap, based on Trefis Machine Learning analysis.
- Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.
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2. Gap Is More Profitable, But It Comes With Higher Risk
- Gap’s current operating margin of 3.1% is better than -3.2% for Penumbra.
- This compares with 4.0% and 8.7% figures seen in 2019, before the pandemic, respectively.
- Gap’s free cash flow margin of 3.8% is better than 2.5% for Penumbra.
- Our Penumbra Operating Income and Gap Operating Income dashboards have more details.
- Looking at financial risk, Penumbra is better placed than Gap. Its <1% debt as a percentage of equity is much lower than 34% for Gap, while its 18% cash as a percentage of assets is higher than 7% for the latter, implying that Penumbra, with its better debt position and higher cash cushion, offers lower financial risk compared to Gap.
3. The Net of It All
- We see that Penumbra has demonstrated better revenue growth over the recent years and comes with lower financial risk. On the other hand, Gap is more profitable and trades at a comparatively lower valuation.
- Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe Penumbra is currently the better choice of the two, despite its higher valuation.
- The table below summarizes our revenue and return expectations for Penumbra and Gap over the next three years and points to an expected return of 70% for Penumbra over this period vs. just a 2% expected return for Gap, implying that investors are likely to be better off buying PEN over GPS, based on Trefis Machine Learning analysis – Penumbra vs. Gap – which also provides more details on how we arrive at these numbers.
While PEN stock may outperform GPS, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Target vs. Williams-Sonoma.
|S&P 500 Return||-6%||-18%||74%|
|Trefis Multi-Strategy Portfolio||-5%||-21%||209%|
 Month-to-date and year-to-date as of 5/23/2022
 Cumulative total returns since the end of 2016
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