Cantel Medical (CMN) specializes in disinfection equipment for dental offices and medical centers. Its products range from face masks to complex endoscope sterilization machines. Fiscal Q3 earnings announced this morning were $0.30, up 11% sequentially from $0.27 and up 58% from $0.19 year-earlier. The stock popped up above $24 following the news. This follows on a 52-week low of $12.68 and high of $25.55.
Cantel has been growing through a strategy of making relatively small, strategic acquisitions while also introducing new products based on its own research and development. In 2011 it made three acquisitions. That added some debt, now near $100 million. The acquisitions have gone well, with cost reductions combining with higher sales levels. Gross margins rose 6% from year earlier to 43.8%.
Fiscal Q3 2012 revenue was $97.2 million, down slightly sequentially from $97.3 million, but up 18% from $82.6 million year-earlier. Net income was $8.2 million, up 12% sequentially from $7.3 million and up 64% from $5.0 million year-earlier. Clearly profits are growing faster than revenues. However, management expects margins growth to flatten out, so future earnings growth will be based on increased revenues.
Most of the revenue comes from four major components: endoscopy at $38.6 million, water purification at $26.0 million, healthcare disposables at$19.3 million, and dialysis at $8.9 million. The sterilization of endoscopes, and sales of supplies for endoscopic procedures, saw revenues rise 41% y/y. With an aging population in the U.S., endoscopic procedures tend to ramp at a pretty steady rate.
One are the company admits it can do better in is international sales. Those only account for 10% of sales at present. Cantel plans to hire more sales personnel in Europe, Asia, and South America this year, mainly to sell endoscopy products.
Another area of future expansion is the healthcare disposables segment, which mainly manufactures disposable face masks for infection control, including some with innovative designs. Originally coming out of the dental sector, these masks are beginning to penetrate medical and veterinary sectors.
Cantel Medical pays a small dividend, under 0.5% per year. Given its rapid growth plans, I believe cash flows will continue to be used to pay down debt or to make further acquisitions. The cash balance at the end of the quarter was $25 million. Cash flow in the quarter was $13 million. It would take less than two years for Cantel to pay off its debts if all cash flow went to that purpose. Given today's low interest rates, it seems like a better strategy to make acquisitions, if they turn out as good as the ones made in 2011.
As a technology and biotechnology investor, it is an obscure data point that most impresses me. Research and development expenses were only $2.2 million in the quarter. Compare that to how much it costs to take a new drug through clinical trials, or design a new semiconductor chip, and you will see why I like Cantel's profit model so much.
Disclaimer: I have owned Cantel Medical since December, 2009. I will not trade the stock for a week from today.
See also my Q3 2012 Cantel Medical notes