Masimo's Narrow Miss on Both Lines

Masimo Corporation ( MASI - Analyst Report ) , a leader in non-invasive monitoring technology for patient care, reported third quarter 2012 adjusted earnings per share of 24 cents, missing the Zacks Consensus Estimate by a penny. However, the result was in line with the year-ago earnings.

Reported profit declined almost 7% year over year to $13.8 million.

Revenue Analysis

Revenues in the quarter increased 14% year over year to $119.1 million, trailing the Zacks Consensus Estimate of $121 million. Year-over-year growth was led by record sales of the company’s well regarded rainbow products.

Product revenues were up 15% (up 12% after accounting for recent acquisitions) to $112.1 million in the reported quarter. Masimo’s global end-user business (85% of product revenue) improved 15% year over year, revenues from Original Equipment Manufacturer (OEM) (15% of product revenue) were up 13%. Sales of rainbow products soared 41% year over year to $11 million and included a 92% hike in total hemoglobin (SpHb) revenues.

During the quarter, Masimo shipped about 33,100 Masimo SET pulse oximetry and Masimo rainbow SET pulse co-oximetry units excluding hand-held sets, flat year-over-year. The company’s worldwide installed base increased 11% year over year to about 1,056,000 units at the end of the third quarter.

Margins

Gross margin stood at 68.8% in the quarter, flat on a year-over-year basis. Operating margin declined to 15.1% from 18.2% a year ago.

Balance Sheet

Masimo ended the quarter with cash and cash equivalents of $113 million, down 21.1% year over year. The cash used for recent acquisitions and share repurchases accounted for the decline in cash and cash equivalents.

Guidance Reaffirmed

Masimo reiterated its guidance for 2012 during the third quarter conference call. The company forecasts total sales of $494 million comprised of product sales of $466 million and $28 million of royalty. Masimo forecasts reported earnings per share of $1.11 for 2012.

Dividend

In a concerted effort to boost shareholder value, the Board of Directors of Masimo announced a special dividend of $1.00 per share. The dividend will be paid on December 11 to shareholders of record as of November 27.

Our Take

Masimo is a market leader in the pulse oximetry monitoring equipment industry. The company’s prospects are encouraging, given the sizeable global market opportunity, adoption of pulse oximetry in non-critical areas of the hospital and growing barriers to entry due to additional non-invasive parameters.

While Masimo’s patented SET offering remains its mainstay, the rainbow measurements represent another growth driver beyond hospital care. However, the company’s reliance on third-party providers like OEMs for a part of its business and customer concentration raises concern. Additionally, we remain concerned about Masimo’s reliance on group purchasing organizations for the sale of its pulse oximetry products to hospitals in the domestic market.

We also note Covidien’s ( COV - Analyst Report ) efforts to expand its oximetry and monitoring products portfolio. Last month, the company won U.S. Food and Drug Administration (FDA) 510(k) approval as well as European Economic Area (EEA) CE Mark clearance for its Nellcor Bedside Respiratory Patient Monitoring system.

We currently have a long-term ‘Neutral’ recommendation on Masimo. The stock carries a Zacks #3 Rank, which translates into a short-term Hold rating.