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Bull of the Day: Penumbra (PEN)

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Penumbra (PEN - Free Report) is a $5 billion medical device company focused on interventional products for neurovascular and peripheral vascular diseases.
 
The company leverages its expertise in catheter-based technology to develop access devices for treating strokes, aneurysms, deep vein thrombosis, pulmonary embolism, and other patient events caused by blood clots.
 
Based in Alameda, CA, Penumbra sells its products to hospitals and clinics primarily through its direct sales organization in the United States, most of Europe, Canada and Australia, and through distributors in select international markets.
 
On August 7, the company reported Q2 earnings and delivered a 400% EPS beat as well as raising sales guidance with total 2018 revenue to be in the range of $420 million to $425 million, vs. the previous range of $410 million to $415 million.
 
You would not have guessed those kind of results looking at the stock reaction the next day when shares plunged 16% from $148 to $124 on 3 times the normal volume.
 
But it probably had something to do with investors getting nervous that maybe the growth estimates and guidance weren't really good enough to justify the steep valuation. 
 
Growth Catches Up with the Valuation
 
The company made a strong swing to sustainable profitability this year on the back of projected 27.5% sales growth from last year's $333 million to over $425 million in revenue.
 
The profit surge -- from last year's loss of 1-cent to a current estimate of +$0.34 -- caught analysts way off guard. We know this because in the last two quarters, the company delivered consecutive 400% EPS beats.
 
And that's why the stock is a Zacks #1 Rank as analysts scrambled to raise full-year 2018 EPS estimates 70%, since the early August quarterly report, from $0.20 to $0.34.
 
Additionally, 2019 top-line estimates are currently looking for over 20% growth to a record $500 million, giving Penumbra a 10X price-to-sales ratio.
 
This sales advance is expected to translate to the bottom line next year with 72% EPS growth to $0.59. At $150 per share, that would put the forward P/E multiple under 300X.
 
That's still rich, but characteristic of med-tech companies with key patents and strong sales growth.
 
Med-Tech in Spotlight After Cardio Conference
 
Today is the last day of the Transcatheter Cardiovascular Therapeutic conference in San Diego, CA. Monday saw a good bit of positive reaction for other "med-tech" (medical technology) companies like Edwards Lifesciences (EW - Free Report) whose shares surged 7.5% on positive data in their transcatheter mitral heart valve technology, an offshoot of their tremendous success and market leadership in aortic valve replacement using catheters instead of dangerous open-heart surgery.
 
But that rally to new highs above $165, which began with a new weekly closing high Friday above $153, got a boost from a Barron's article by Bill Alpert published Monday morning which used a September 16 Wells Fargo research report to suggest that EW could be an M&A target for Johnson & Johnson (JNJ - Free Report) .
 
Lots of speculation there, but Alpert shared important insights by analyst Larry Biegelsen as med-tech device M&A heats up following last week's fold-in of spinal surgery outfit Mazor Robotics by Medtronic (MDT - Free Report) , which already owned about 20% of the company, for $1.64 billion:    
 
"Mergers among device makers will also probably continue. Lately, [Biegelsen] writes, J&J Chief Executive Alex Gorsky has called out the increasing innovation and friendlier regulation of devices, compared with some other products."
 
In the afternoon, Allison Gatlin writing for Investors Business Daily made this astute observation: "Also helping Edwards on Monday, Abbott (ABT - Free Report) announced positive results from a study of its MitraClip device in patients with leaky heart valves. The study showed that using the MitraClip plus traditional medical therapy in these patients is superior to medical therapy alone." 
 
Abbott shares were up 3.5% to new 52-week highs on the news.
 
Cooker Had M&A on the Brain Sunday 
 
One smaller player I'm watching in the middle of all these titans of med-tech is AxoGen (AXGN - Free Report) , a $1.4 billion maker of nerve repair technologies for surgeons.
 
Before Monday's action in EW and ABT, off the cardio conference and Barron's article, this is what I wrote on Sunday to members of my Healthcare Innovators portfolio where we own JNJ, EW, and AXGN:
 
When we bought AxoGen in late July, I told you AXGN has one mid-cap competitor in the $5 billion Integra LifeSciences ((IART - Free Report) ). But both could be great bolt-on acquisitions for a Medtronic or a Stryker ((SYK - Free Report) ). 
 
I still believe the superior peripheral nerve regeneration and repair technologies of AxoGen are an undervalued asset, especially now under a $1.5 billion market cap. With the giant Baxter ((BAX - Free Report) ) and the $5 billion Integra moving into the space, AxoGen remains a cheap target for Stryker or JNJ.
 
Or even Edwards Lifesciences (EW - Free Report) if they wanted to expand beyond cardiovascular products. Speaking of EW, one of our top movers last week with a new ATH weekly close above $153.
 
If you don't have a position in AXGN, I recommend starting one between $33 and $36. Sure it's possible that this little stock gets pushed back down under $30 after the run it's had. But they have the best technology in a $2-3 billion TAM (total addressable market) where they could 5X their sales to at least $500 million.
 
And trading only 4X sales would put the stock at $2 billion or about $50. There's a few "ifs" in there but I believe the risk/reward is good here for such a bet.
 
I'm betting bigger MedTech companies (like SYK, JNJ, etc) see that and want to participate.
 
(end of my Sunday commentary for Healthcare Innovators)
 
What About Penumbra?
 
I went through all this M&A action and reaction in med-tech for a good reason. If you have trouble wrapping your head around PEN's P/E of 250X (rounding next year's 60-cents EPS against $150/share), then you have to focus on the growth rates, the TAM (total addressable market), and the M&A competition.
 
You may not want to pay 250X, but plenty of large growth investors will when they look at these dynamics.
 
The Wells Fargo analyst Larry Biegelsen cited in the Barron's article about EW and BAX is also the lone voice with the highest aspirations for Penumbra. 
 
On August 7 when the company reported and shares plunged 16% from $148 to $124, Biegelsen put out a note reiterating his bullish views and $180 price target.
 
On August 9 he put out a note title "JET-ENGINE Ready for Take-Off!" as he described the company's new technologies for aspiration procedures in treating stroke, where a deep vacuum suction is sometimes used to aspirate the clot... 
 
While new competitors have entered the aspiration market this year with approved devices, we believe that PEN will continue to lead the field with its innovative technology with the new ENGINE pump that launched recently and the JET catheter that is pending FDA approval. 
 
Then on August 17, the FDA cleared PEN’s Jet 7 aspiration catheter for stroke. I wish I had been paying closer attention to this company in August because even with all this enthusiasm and good news, the stock still languished, even dipping under $120 on August 15 before smart investors took it higher into September. 
 
The PEN is Mightier Than the Scalpel
 
If I learned one thing from my long-term investing in med-tech companies like Edwards Lifesciences (we originally bought EW in 2017 under $100) it's that technology innovation with catheter-based solutions creates less-invasive emergency surgical procedures that save lives without putting patients at greater risk.
 
In the case of EW, the ability for a heart specialist to install a new valve in an older patient who would be too high-risk for open-heart surgery has been a tremendous godsend for many thousands of heart patients and their families.
 
With Penumbra's innovations in neuro procedures, including differentiated solutions for access, stroke revascularization, and embolization for use in the neurovasculature, they are offering brain specialists new avenues for treating and saving patients with severe neuro-vascular events.
 
And the innovation pathways for PEN are expanding in other exciting ways too. On September 4, the company closed on the $20 million acquisition of a controlling interest in its joint venture, MVI Health, which was created to be a leader in virtual reality software and tracking solutions for healthcare applications.
 
The possibilities of advanced surgical and catheter-based procedures using virtual and augmented reality must have even the robot surgeons jazzed!
 
Disclosure: I own shares of EW, JNJ, and AXGN for the Zacks Healthcare Innovators portfolio.
 
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