Medical Stocks

Surmodics Inc Valuation – August 2018 $SRDX

Company Profile (excerpt from Reuters): Surmodics, Inc., incorporated on June 27, 1979, is a provider of medical device and in vitro diagnostic technologies to the healthcare industry. The Company operates through two segments: Medical Device and In Vitro Diagnostics. The Company’s business segments partner with medical device, diagnostic and life science companies to develop and commercialize products designed to improve patient diagnosis and treatment. As of September 30, 2016, the Company had over 150 licensed product classes (customer products utilizing Surmodics technology) in the market generating royalties and over 100 customer product classes incorporating its technology in various stages of pre-commercialization.

 

Downloadable PDF version of this valuation:

ModernGraham Valuation of SRDX – August 2018

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $918,403,843 Fail
2. Sufficiently Strong Financial Condition Current Ratio > 2 2.50 Pass
3. Earnings Stability Positive EPS for 10 years prior Fail
4. Dividend Record Dividend Payments for 10 years prior Fail
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end -750.00% Fail
6. Moderate PEmg Ratio PEmg < 20 222.01 Fail
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 8.55 Fail
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 2.50 Pass
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 0.00 Pass
3. Earnings Stability Positive EPS for 5 years prior Fail
4. Dividend Record Currently Pays Dividend Fail
5. Earnings Growth EPSmg greater than 5 years ago Fail

 

Stage 2: Determination of Intrinsic Value

EPSmg $0.32
MG Growth Estimate -4.25%
MG Value $2.09
Opinion Overvalued
MG Grade F
MG Value based on 3% Growth $4.60
MG Value based on 0% Growth $2.70
Market Implied Growth Rate 106.75%
Current Price $70.45
% of Intrinsic Value 3369.63%

SurModics, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the small size, insufficient earnings stability or growth over the last ten years, and the poor dividend history, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the lack of earnings stability or growth over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $0.46 in 2014 to an estimated $0.32 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 106.75% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into SurModics, Inc. revealed the company was trading above its Graham Number of $0. The company does not pay a dividend. Its PEmg (price over earnings per share – ModernGraham) was 222.01, which was above the industry average of 44.66. Finally, the company was trading above its Net Current Asset Value (NCAV) of $2.09.

SurModics, Inc. scores quite poorly in the ModernGraham grading system, with an overall grade of F.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) $2.09
Graham Number $0.00
PEmg 222.01
Current Ratio 2.50
PB Ratio 8.55
Current Dividend $0.00
Dividend Yield 0.00%
Number of Consecutive Years of Dividend Growth 0

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Most Recent Balance Sheet Figures

Balance Sheet Information 6/1/2018
Total Current Assets $78,846,000
Total Current Liabilities $31,585,000
Long-Term Debt $0
Total Assets $159,987,000
Intangible Assets $45,562,000
Total Liabilities $51,242,000
Shares Outstanding (Diluted Average) 13,203,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate -$0.27
Sep2017 $0.29
Sep2016 $0.76
Sep2015 $0.90
Sep2014 $0.87
Sep2013 $1.03
Sep2012 $0.59
Sep2011 -$1.06
Sep2010 -$1.21
Sep2009 $2.15
Sep2008 $0.80
Sep2007 $0.18
Sep2006 $1.09
Sep2005 -$0.45
Sep2004 $0.41
Sep2003 $0.78
Sep2002 $0.44
Sep2001 $0.29
Sep2000 $0.25
Sep1999 $0.14
Sep1998 $0.12

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $0.32
Sep2017 $0.66
Sep2016 $0.84
Sep2015 $0.75
Sep2014 $0.46
Sep2013 $0.27
Sep2012 $0.01
Sep2011 -$0.13
Sep2010 $0.43
Sep2009 $1.08
Sep2008 $0.50
Sep2007 $0.37
Sep2006 $0.46
Sep2005 $0.19
Sep2004 $0.49
Sep2003 $0.48
Sep2002 $0.30

Recommended Reading:

Other ModernGraham posts about the company

5 Best Stocks for Value Investors This Week – 2/18/17
SurModics Inc Valuation – Initial Coverage $SRDX

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Disclaimer:

The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.

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