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Masimo Corporation (MASI - Analyst Report), a leader in non-invasive monitoring technology for patient care, recorded fourth quarter and 2012 earnings per share of 26 cents and $1.04, respectively, missing the corresponding Zacks Consensus Estimates of 28 cents and $1.09 but beating the year-ago earnings per share of 23 cents and $1.05, respectively. Reported profit rose 8.6% year over year to $15 million in the fourth quarter.

Revenue Analysis

Revenues in the quarter increased 18% year over year to $132.2 million, beating the Zacks Consensus Estimate of $128 million. For 2012, revenues moved up 12% to $493.2 million, surpassing the Zacks Consensus Estimate of $490 million.  

Product revenues were up 20% to $125.3 million in the reported quarter. Masimo’s global end-user business (85% of product revenue) improved 18% year over year, while revenues from Original Equipment Manufacturer (OEM) (15% of product revenue) were up 28%. Sales of Rainbow products increased 13% year over year to $11.1 million. 

During the quarter, Masimo shipped about 42,700 Masimo SET pulse oximetry and Masimo Rainbow SET pulse co-oximetry units, excluding hand-held sets, up 24% year-over-year. The company’s worldwide installed base increased 11% year over year to about 1,088,000 units at the end of the fourth quarter.

Margins

Gross margin stood at 66% in the quarter, higher than 65.5% a year ago. Operating margin declined to 16.9% from 17.9% a year ago.

Balance Sheet

Masimo ended the quarter with cash and cash equivalents of $71.6 million, down 44.9% year over year.

Guidance

Masimo issued its guidance for 2013. The company forecasts total sales of about $548 million comprising of product sales of $520 million and $28 million of royalty. Masimo expects reported earnings per share of $1.14 for 2013.

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. 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) effort to expand its oximetry and monitoring products portfolio. In late 2012, 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.

The stock carries a Zacks Rank #4 (Sell). We are more positive about Given Imaging Ltd. and Novadaq Technologies Inc. (NVDQ - Snapshot Report) both of which are Zacks Rank #1 (Strong Buy) and are expected to do well.

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