by Travis Johnson, Stock Gumshoe | February 11, 2013 3:01 pm
Hospital acquired infections are a huge health care problem — and where there’s a huge problem, there are people trying to make money by solving it. That’s the beauty of the entrepreneurial spirit … and you’ve probably seen various teasers over the years about companies that are trying to “kill the superbugs” and help both to prevent hospital infections and to fight the resistant bacteria that have evolved to survive standard antibiotics[1].
Some of these picks have worked pretty well — the ones that promise cleaners that kill bugs dead-er haven’t impressed much, since bleach does a fine job on the most resistant bacteria and many of those were penny stock wipeouts, but the new super antibiotics have led to some profitable stocks in recent years, including Cubist (CBST) after it was teased by Mark Skousen[2] back in 2010 on the strength of the Cubicin MRSA-fighting antibiotic (that one has almost doubled since November 2010).
I’ve actually been intrigued by a little company that’s not yet public, too, because it’s developed a UV bug-killer that’s fancy enough that hospitals are actually using it in their marketing — anything that can help a hospital differentiate itself from competitors on the germ-fighting front is a competitive advantage, so as you see hospital billboards advertising a particular product just picture Intuitive Surgical (ISRG)[3], they turned the da Vinci surgical robot into a world-beating product by first developing a real medical case in one kind of surgery[4], then helping hospitals to market the heck out of it so every hospital felt the need to buy one to keep up with their neighbors and keep from losing surgeons and patients.
That little company also builds something they call a robot, though it’s a room-cleaning robot that uses UV light to sterilize hospital rooms — that product is from a company called Xenex, and they’re using at our local hospital[5]. It has gotten some press attention, but the company is still very small and venture-backed so I can’t buy shares. Maybe it will come public at some point over the next few years, we’ll see.
But the reason for that startup is that the problem is real and large, and hospitals are very motivated to help solve it for both human and financial reasons (infections cost hospitals money, and government penalties and incentives are pushing hospitals to fight infection much more fiercely over the next few years).
So what is the stock that Hilary Kramer[6] says is the owner of the patented “Superbug Firewall” that will profit from this battle to reduce hospital infections?
Here’s how she pitches it:
“With updated regulations from the U.S. Department of Health, hospitals and healthcare[7] facilities are scrambling to improve their infection procedures.
“The Wall Street Journal reports that the government has set a goal of reducing hospital-acquired infections and other preventable problems by 40% this year from 2010 levels.
“This will lead to a ballooning $45 billion global infection prevention and control market.
“And one tiny U.S.-based healthcare company is at the forefront of this booming market…
“Game-Changing Stock #1:
“Life-saving ‘Superbug’ Firewall’ Technology Detected
“Only ONE tiny U.S.-based company has the exclusive patented rights to a host of groundbreaking infection control and prevention technologies… which I call the “superbug firewall”… that could reduce healthcare acquired infections by nearly 70%.
“Potentially preventing 1.4 million hospital acquired infections and saving up to 70,000 lives per year in the U.S. alone…
“This emerging medical devices company is a one-stop shop of infection control and prevention products ranging from water[8] purification to filtration to healthcare disposables to sterilization to endoscopy to specialty packaging for infectious specimens….”
OK, any more clues about which specific company she’s teasing?
“This has sent this booming company’s net income up over 50% in its latest quarterly results versus the same period last year….
“I was excited to uncover this fast-growing medical device company that is creating breakthrough sterilization and sanitization technologies as well as other cutting-edge medical supplies for hospitals, dentists, and doctors.
“With its ‘superbug firewall’ technologies, this company maintains a leading share in every infection control and prevention niche… including endoscopy, water, dental disposables, and dialysis.”
And she breaks out some of their key products:
- “Endoscopy — Endoscopes are expensive items, and in the past have been cleaned manually, but the lack of uniformity in the process increases risk of infection.
But this medical device company has drastically reduced the risk of infection by carefully preparing the endoscope the right way for its next use. This is known as reprocessing, and it includes manual cleaning, high level disinfection (HLD), and proper drying and storage.
- Water purification — This company’s groundbreaking water purification systems produce biologically pure water used in the healthcare, life sciences, food and beverage, and commercial industrial markets.
- Healthcare Disposables — The outbreak of the H1N1 flu in 2010 increased public awareness about controlling and preventing infectious diseases… And this company is a worldwide leader in innovative new face masks, sterilization products, towels and bibs that could drastically reduce infectious diseases.
- Dialysis — With only one-third of dialysis clinics in the U.S. reusing dialyzers, this company’s cutting-edge dialysis product allows for the reuse of dialyzers, which is huge cost savings for hospitals.”
So … who is it?
This one, sez the Mighty Mighty Thinkolator, is Cantel Medical (CMN)
Cantel is a good-sized small cap company, with a market cap of over $800 million, and they’ve been consistently profitable and very acquisitive over the years, snapping up little companies to provide them with new products and services in their infection fighting niche, and hopefully more future growth.
The stock is not cheap, at about 25X trailing earnings, and 20X forward estimated earnings (you can’t put much stake in the analyst estimate because it comes from just the single analyst who covers the stock), but they did boost earnings by more than 50% over the past year, their best growth since they came out of the financial crisis, and they’ve put most of their cash flow into acquisitions without taking on massive amounts of debt (they do carry some debt, but only about $80 million — easily manageable).
I haven’t looked at Cantel before today, but here’s what I like:
I’m not rushing out to buy the shares, to be sure, but I like the niche and the company seems to be doing well — it’s near a 52-week high, and it’s arguably expensive at the moment, but the sector is poised for a good few years and the company is profitable and trades for only 2X trailing sales, so I would suspect that the major concern is likely to be competition. I don’t know anything about the competitors in this space, but I would assume that most of the massive hospital product providers like Becton Dickinson and Covidien are probably also active in selling infection-fighting products and services, so that competitive landscape is something I’d be trying to understand before buying stock in Cantel Medical.
And, of course, as with any other newsletter pundit Hilary Kramer’s stamp of approval on a “GameChanger” is no guarantee that this will be a winner — as we might remember more vividly if we look back on the last one of her medical device picks that we covered, the disappointing Zeltiq Aesthetics (ZLTQ) [9]that collapsed just weeks after she teased it about a year ago and has drifted still further down in the months since. Of course, fighting MRSA and hospital infections is a much better sell than helping already skinny and healthy people to make their bodies look just a hair more perfect.
If you’d like to get a quick overview of what CMN does and how they’ve grown the business, they have a pretty good investor presentation up on their website here[10]. Those of you who are interested enough in Cantel to go forth and researchify a little bit, give us a shout with a comment below and let us know if you see any red or green flags as you sniff around.
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not really a great idea to buy a stock when large customer DaVita is transitioning to single use machines that don’t require services from Cantel. from 10Q “ctober 31, 2012, compared with the three months ended October 31, 2011, due to a decrease in demand primarily in the United States (including a decrease from our largest dialysis customer, DaVita, Inc. (“DaVita”)) for our RENATRON� dialyzer reprocessing equipment and sterilants. Our market for dialysis reprocessing products is limited to dialysis centers that reuse dialyzers, which market has been decreasing in the United States despite the environmental advantages and our belief that the per-procedure cost of reuse dialyzers is more economical than single-use dialyzers. The shift from reusable to single-use dialyzers is principally due to the lowering cost of single-use dialyzers, the ease of using a dialyzer one time, and the commitment of Fresenius Medical Care, the largest dialysis provider chain in the United States and a manufacturer of single-use dialyzers, to convert dialysis clinics performing reuse to single-use facilities. In addition, DaVita has been evaluating the economics and other factors associated with single-use versus reuse on a regional basis. This evaluation has resulted in the conversion by DaVita of certain clinics from reuse to single-use and in many cases the opening of new clinics as single-use clinics. A further decrease in the market for reprocessing products is likely to result in continued loss of net sales and a lower level of profitability and operating cash flow in this segment in the future as well as potential future impairments of long-lived assets. Additionally, our Dialysis segment is highly dependent upon DaVita as a customer and any further shift by this customer away from reuse would have a material adverse effect on our Dialysis segment net sales. Changes in selling prices of our dialysis products did not have a significant effect on net sales for the three months ended October 31, 2012 compared with the three months ended October 31, 2011.”
also the largets portion of revs from Endoscopy isn’t growing much either – less than 2%. I will pass at this valuation
Excellent comment, thanks.
Travis my good man you have done what I love about this paper you have give us a good look into a co. that seems interesting enough to put some work on it and just may be make us some bucks. You see this is what I would call some good advice,but not brain washing . The brain washing is what I feel like the people like Hilary Kramer is doing. God I hate those little movies they send us. They go on and on about a lot of nothing and there’s not telling you one da– thing that has much to do with the stock there pushing. I know its all about signing up to there service. None of which I have found of much real use. The Gum Shoe has on the other hand lead me to some real good co’s over time that has made me some nice returns. So Travis thanks for what you do your a real service to man kind.
Happy investing to all.
I too agree with Johnny as I’ve worked in hospitals for 35 years, and Cantal has well established competitors like Baxter, Da Vita, (a Buffett holding) Steris, and many other water filtration companies. too. I looked at the Medivators subsidiary, that seems to have the most interesting product lines. They have a bio fog that they use for decam. Much of what they make is already negotiated by big purchasing groups such as Med Assets, Premier, Novation, to combine purchasing clout, and beat down medical surgical item prices like face masks. That’s why they are over in the more lucrative dental market. DRG’s > diagnostic related groups, Medicare fee for diagnosis, pays a flat rate no matter how much money a hospital spends on each case. No wide moat to entry on their products.
So, over to the technicals: wave #5 Elliott, which means its topping, negative money flow as of 2/5, and very little if any, open option interest. open interest bearish put call ratio of 1.62.
More people are betting on support between 20- 30 next few months out. The upcoming catalyst is an earnings report on March 7th. The consensus is 0.38 eps. It beat in June, gapped up then, but lost a cent in October’s report.
So, it’s a short term bullish up to earnings, and it could be a10% loss if they don’t beat expectations. I’m going to pass on it; maybe go for DaVita on a pullback.
Sharon,
you like anything in the dental market? thx
While we’re on the subject of hospital infections, here is another company to keep an eye on:http://eos-surfaces.com They have developed a copper infused line of products that kill 99.9% of all pathogens that come in contact with them without any labor. These products are going into large scale tests with local hospitals.
I’m just waiting for them to go public so I can get a piece.
Hydrogen peroxide vapor is highly effective against MRSA and doesn’t cost an arm and a leg. Used with tremendous success in Europe.
“Recontamination” concerns are fueled mostly by companies standing to make a heady profit with their “superbug cleaner”. This one should be in the KISS catagory, keep it simple stupid. Sometimes the patent doesn’t mean its a superior product, but buying into the fear makes you believe it is.
I’ll pass.
is anyone got the phone sticking it to you companies to by tout by Motly
Don’t overlook CBST’s (pharma) success
Take another look at that hydrogen peroxide
Mixed with distilled water . You drink it and its been knobs
To stop and kill a whole bunch of things.
Buy the Book, it’s called the One Minute Cure or something
Like that. It gets oxygen into your body..
It needs to be “Food Grade” hydrogen peroxide. Not the brown bottle stuff.
I bought PSMT some time ago and have a 51% gain so far. I think I first picked this name up at the Motley Fool not from Hillary, but I am not sure. As with any of these newsletters it is interesting to look at the number of winners and losers they have. Though both Hillary and the Fool have some big winners, as many of you point out they have some bad flops too. What I like about Hillary is that she puts out alerts telling you to sell. The Motley Fool hangs on far to long to losers and bails out only after the stock has flopped. If any of these services are great i would expect a winner to loser rato of 4 to 1 at least and I have not seen that from any of them. One other recent winner from Hillary was ICPT that I just sold for a 25% profit over less than 2 months.