Masimo (MASI Quick QuoteMASI - Free Report) and activist investor Politan Capital Management have been at odds since last year after the latter acquired an 8.4% stake in the former. The activist investor now wants to replace MASI’s CEO, Joe Kiani, with one of its selected persons. It has proposed two candidates for board seats, including Kiani’s, with a proxy vote to be held at MASI’s annual general meeting (AGM) on Jul 25.

Politan has accused Masimo's leadership of mismanagement and stated that its board lacks independent oversight. MASI, on the other hand, has held Politan responsible for false narratives and released a series of documents in support of the same. It did so in a bid to woo all investors to vote for Kiani.

Politan already has two members on MASI’s board. A potential removal of Kiani, who is also the founder of Masimo, from the board may have an unfavorable impact on the company’s share price. The company’s top management and employees have voiced their support for Kiani. However, the proxy vote will decide the future of Kiani at the company.

The Politan Saga

Politan bought its stake in Masimo in 2023, stating that Masimo’s shares were undervalued and represented an attractive investment opportunity. Politan has been trying to gain control of MASI’s board since then.

The activist investor has been advocating for change in Masimo’s corporate governance, emphasizing the need for independent oversight and greater accountability on the company’s board. It claims that the company has broken governance and control of the board should help it in enhancing capital allocation and refocusing MASI’s strategy to unlock its full potential. Politan won the last proxy vote held in June last year and successfully placed Michelle Brennan and Quentin Koffey on Masimo’s board.

Politan has blamed Masimo’s weak share price performance on its acquisition of Sound United, known for its high-end consumer audio brands such as Bowers & Wilkins and Denon, in 2022. Meanwhile, the recent spat between the company and the investors was led by Masimo’s decision to separate its consumer audio and consumer health products businesses. Politan has raised concerns over Kiani’s proper oversight of the deal. This can lead to a spin-off with poor corporate governance and Intellectual Property arrangements.

Masimo Fights Allegations

Masimo has created a webiste, protectmasimosfuture.com, to provide information to its investors about the company’s performance and post documents refuting Politan’s narratives. The company has defended its record and stated that Politan is providing inaccurate and misleading information to its stockholders in order to gain control of MASI’s board.

However, Masimo’s employees continue to have faith in Kiani for driving its progress over the long run. Recently, nearly 300 engineers signed a letter expressing support for the current CEO publicly in the proxy battle that threatens to oust him. The engineers warned about the prospect of losing Kiani, an engineer himself who founded the company in 1989, in the letter. This may jeopardize Masimo’s prospects. They also stated that they may decide not to continue at Masimo if Kiani is replaced.

Apart from the engineers, Masimo’s chief operating officer, Bilal Muhsin, has also voiced his support for Kiani, stating that he may also decide to step down from his current position upon the potential removal of Kiani. Other company executives also signed letters in June 2023 backing Kiani’s leadership.

Share Price Impact

Masimo’s shares have lost 2.6% year to date against the industry’s growth of 3.1%. The S&P 500 Index has increased 16.6% in the same period.

Image Source: Zacks Investment Research

However, shares of the company have been on a declining trend after touching its all-time high in November 2021. Although Politan invested in Masimo in early 2022, the latter started a bigger battle in 2020 when it sued Apple (AAPL Quick QuoteAAPL - Free Report) , the world’s largest phone maker as well as one of the top companies in terms of market capitalization, over patent infringement related to a blood oxygen sensor. The ongoing litigation with Apple has been a major cause of concern for Masimo’s investors in the past few years.

Per the latest ruling in January 2024 (regarding the ongoing patent dispute litigation), Apple has to stop selling the watches with the oxygen measurement feature while an appeal of the ban plays out. A ban on Series 9 and Ultra 2 watches from Apple in the United States may be beneficial for Masimo’s W1 watches that come with blood oxygen sensors.

The wearable healthcare devices market represents a robust opportunity. It is expected to witness a CAGR of more than 11% over the next four to five years and reach $69.2 billion by 2028. AAPL will try its best to resolve the litigation and clear its name as it may taint its image. Although a ban on two watch models is unlikely to have any significant impact on the company’s top line or growth potential, it can get murkier for Masimo with smaller product portfolio as well as lesser resources. Meanwhile, the challenges related to board member selection may affect Masimo’s focus with the litigation. The potential ouster of Kiani may also lead to a settlement with Apple rather than a resolution within the court.

Masimo is currently facing challenges, inside as well as outside, from significant players. This is likely to continue to impact the company’s shares unfavorably going forward. If Kiani wins, Masimo is likely to face more pressure from Politan and its fight with Apple. However, in the case of Kiani’s ouster, the company may lose its management and engineers, which may affect its performance.

Zacks Rank & Other Key Picks

MASI presently carries a Zacks Rank #2 (Buy).

A couple of other top-ranked stocks from the broader medical space are DaVita (DVA Quick QuoteDVA - Free Report) and Ecolab (ECL Quick QuoteECL - Free Report) .

DaVita, carrying a Zacks Rank of 2 at present, has an estimated long-term growth rate of 13.6%. DVA’s earnings surpassed estimates in each of the trailing four quarters, with the average surprise being 29.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

DaVita’s shares have risen 31.6% compared with the industry’s 5.6% growth year to date.

Ecolab, carrying a Zacks Rank of 2 at present, has an estimated long-term growth rate of 13.3%. ECL’s earnings surpassed estimates in each of the trailing four quarters, the average surprise being 1.7%.

Ecolab’s shares have risen 18.9% against the industry’s 21.5% decline year to date.