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Cantel Medical

January 07, 2009 – Comments (0) | RELATED TICKERS: CMN

Cantel Medical Corp. (NYSE:CMN) is a provider of infection prevention and control products in the health care market. It also manufactures specialty packaging for infectious and biological specimens, water purification equipment and disposable infection control products primarily for the dental industry. The company's specialized products are used in medical device reprocessing systems for renal dialysis and endoscopy.

The company has made significant acquisitions in the past few years, including the most recent September 2007 acquisitions of Strong Dental Products, Inc. and Verimetrix, LLC. Strong Dental Products adds a differentiated barrier protection product suite that offers growth in digital radiography. Verimetrix provides a full range of endoscope reprocessing products and services that augments the company’s current offerings.

On Dec. 5, Cantel Medical reported financial results for the quarter ended Oct. 31, 2008. Sales increased 7.3% to $64.4 million from $60 million in the same quarter of 2007. The company had solid sales growth in all reporting segments except for an expected decline in low margin dialysate concentrate shipments in their dialysis segment. During the quarter, the company achieved almost 13% revenue growth exclusive of dialysis. Net income soared 71.9% to $3.3 million, or $0.20 per diluted share, compared with $1.9 million, or $0.12 per diluted share, in the same quarter of 2007.

Cantel Medical has benefited from active cost reduction, margin improvement programs and the implementation of price increases. Additionally, it maintains a strong balance sheet. At the end of the quarter, Cantel Medical recorded $15.7 million in cash and reduced its debt position 21% to $41.6 million. The company was also able to generate over $5.4 million in cash from operating activities.

After the company reported earnings on Dec. 5, the stock regained its 50-day moving average (weekly) and cleared an $11.50 resistance level. We expect to see some profit taking, but we do not want to miss out on a possible huge run. The next barrier for Cantel Medical is $15, which historically has been a tough resistance point. The stock has very clear support at $8 to $9 and we are hoping $13 will become a near-term support level.

Fundamentally, Cantel Medical is cheap. The stock trades around 15 times forward EPS and has a trailing price-to-sales ratio that is less than one. Since we are uncertain about margins going forward, we are going to value Cantel Medical using price to sales as our primary metric. In the current year, we predict sales to be $265.3 million and we believe a 1.25 sales multiple to be reasonable for the stock. This translates to a target price of $20, which represents a value of about 20.5 times estimated forward earnings.