Masimo Downgraded from Buy

We are lowering our recommendation on Masimo Corp. (MASI - Analyst Report) to HOLD based upon valuation. Since initiating a BUY back in January, the stock has returned roughly 17%. We recommend trimming positions around $30.00.

When valuing MASI inline with the current comparable average P/E/G of 1.4, we derive a P/E of 34.3x. Applying this multiple against $0.85 FY09 earnings yields a target price of $29.15, equal to its current market valuation.

We eased into this BUY rating as the company’s strategy is focused on non-critical care, and we weren't certain this segment would hold up in the current economic crisis. However, the fourth quarter demonstrated that hospital spending has not been delayed on these low-cost capital expenditures that help save money. Also, non-critical care demand appeared to remain in tact.

MASI is a market leader in the pulse oximetry monitoring equipment market industry. It has successfully defended its intellectual property and continues forging new relationships with OEMs. The company devotes roughly 8% of revenues in FY08 to research and development, resulting in continued new product launches and advancements. With its razor/razor blade model, strong expansion in its installed unit base will continue translating into future sales and margin growth.