Rating Update: Stock Rating C-Neutral (9/10/19)-NuVasive Inc (NUVA).

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BUSINESS

NuVasive, Inc., a medical device company, develops and markets minimally-disruptive surgical products and procedurally-integrated solutions for spine surgery. Its products focus on applications for spine fusion surgery, including ancillary products and services used to aid in the surgical procedure. The company’s principal product is Maximum Access Surgery, a minimally-disruptive surgical platform, which includes its software-driven nerve detection and avoidance systems, and intraoperative monitoring (IOM) services and support; MaXcess, an integrated split-blade retractor system; and various specialized implants and biologics. Its spine surgery product line offerings comprise products for the thoracolumbar and the cervical spine, which are primarily used to enable surgeons to access the spine and to perform restorative and fusion procedures in a minimally-disruptive fashion.
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INVESTMENT RATING

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With future capital returns forecasted to exceed the cost of capital, NUVA is expected to continue to be an important Value Builder.

NuVasive has a current Value Trend Rating of C (Neutral).
The Value Trend Rating reflects very contradictory signals from PTR’s two proprietary measures of a stock’s attractiveness. NuVasive has a poor Appreciation Score of 29 but a good Power Rating of 79, leading to the Neutral Value Trend Rating.

NuVasive’s stock is selling above targeted value. The current stock price of $63.68 compares to targeted value 12 months forward of $51.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
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NuVasive has a Power Rating of 79. (This good Power Rating indicates that NUVA has a better chance of achieving attractive investment performance over the near to intermediate term than all but 21% of companies in the universe.)
Factors contributing to this good Power Rating include: recent price action has been favorable; and the recent trend in NUVA’s earnings estimates has been favorable. An offsetting factor is is currently in an unfavorable positi.

INVESTMENT PROFILE

NuVasive’s financial strength is high. Financial strength rating is 85.
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Relative to the S&P 500 Composite, NuVasive Inc has neutral Growth/Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that NUVA is normal risk. High expected growth is a positive for NuVasive. Relative weaknesses include: low historical profitability, low historical growth, and high earnings variability. NuVasive’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. NUVA has unusually low market capitalization.

CURRENT SIGNALS

NuVasive’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

NuVasive’s current technical position is very strong. The stock price is in a 6.8 month up move. The stock has appreciated 46.3% from its prior low. The stock price is above its 200 day moving average which is in an uptrend.

ALERTS

Recent minimal positive changes in fundamentals have benefitted NuVasive Inc (NASDAQ: NUVA): the stock’s power rating rose above 70.
The stock is currently rated C.
On 9/10/19, NuVasive Inc (NASDAQ: NUVA) stock suffered a major decline of -10.7%, closing at $0.12. This decline was accompanied by normal trading volume. Relative to the market the stock has been exceptionally strong over the last nine months and is unchanged during the last week.

CASH FLOW

In 2018, NuVasive generated a very significant increase in cash of +$41.1 million (+54%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$239.3 million. Non-operating uses consumed -$62.9 million (-26% of EBITDA). Cash taxes contributed +$3.8 million (+2% of EBITDA). Re-investment in the business amounted to -$147.5 million (-62% of EBITDA). On a net basis, debt investors pulled out -$18.2 million (-8% of EBITDA) while equity investors furnished +$26.7 million (+11% of EBITDA).
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NuVasive’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Nuvasive Inc Peer Group. (Since 2015 Non-operating Income, %EBITDA has experienced a very sharp decline.) In most years, NuVasive was in the third quartile and top quartile. Currently, NuVasive is above median at -26% of EBITDA (-$62.9 million).

NuVasive’s Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by stability for the Nuvasive Inc Peer Group. In most years, NuVasive was in the top quartile and second quartile. Currently, NuVasive is substantially above median at +2% of EBITDA (+$3.8 million).

NuVasive’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Nuvasive Inc Peer Group. (Since 2016 Business Re-investment, %EBITDA has accelerated very sharply.) In most years, NuVasive was in the lower quartile and third quartile. Currently, NuVasive is substantially below median at -62% of EBITDA (-$147.5 million).

NuVasive’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Nuvasive Inc Peer Group. In most years, NuVasive was in the lower quartile and third quartile. Currently, NuVasive is slightly above median at -8% of EBITDA (-$18.2 million).

NuVasive’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nuvasive Inc Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp recovery.) In most years, NuVasive was in the top quartile and lower quartile. Currently, NuVasive is at the lower quartile at +11% of EBITDA (+$26.7 million).

NuVasive’s Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Nuvasive Inc Peer Group. (Since 2016 Change in Cash, %EBITDA has experienced a very sharp recovery.) In most years, NuVasive was in the top quartile and lower quartile. Currently, NuVasive is at median at +17% of EBITDA (+$41.1 million).
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NuVasive’s Cash, %Revenue has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Nuvasive Inc Peer Group. In most years, NuVasive was in the second quartile and top quartile. Currently, NuVasive is below median at +11%.

PROFITABILITY

NuVasive’s return on equity has improved very significantly since 2009.
This very significant improvement was due to very strong positive trend in pretax operating return and little change in non-operating factors.
The productivity of NuVasive’s assets rose over the full period 2009-2019: asset turnover has exhibited a minor overall uptrend.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
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NuVasive’s return on equity is at median (6.1%) for the four quarters ended June, 2019.
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Operating performance (pretax return on assets) is at median (3.4%) reflecting asset turnover that is slightly below median (0.62X) and below median pretax margin (5.4%).
Tax “keep” rate (income tax management) is above median (85.6%) resulting in after tax return on assets that is below median.
Financial leverage (leverage) is above median (2.09X).

GROWTH RATES

There are no significant differences between NuVasive’s longer term growth and growth in recent years.
NuVasive’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 7.9% per year.

Total asset growth has been 6.0% per year.

Annual E.P.S. growth has been 16.2% per year.

Equity growth has been 6.2% per year.

NuVasive’s consensus growth rate forecast (average of Wall Street analysts) is 13.3% — above the average of the historical growth measures.
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Relative to the Nuvasive Inc Peer Group, NuVasive’s historical growth measures are erratic. E.P.S. growth (16.2%) has been above median. Revenue growth (7.9%) has been at the lower quartile. Equity growth (6.2%) has been at the lower quartile. Total asset growth (6.0%) has been lower quartile.

Consensus growth forecast (13.3%) is at the lower quartile.
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PRICE HISTORY

Over the full time period, NuVasive’s stock price performance has been variable and below market. Between November, 2008 and September, 2019, NuVasive’s stock price rose +85%; relative to the market, this was a -44% loss. Significant price moves during the period: 1) October, 2012 – July, 2015: +281%; 2) December, 2011 – June, 2012: +101%; and 3) May, 2011 – December, 2011: -63%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 14.7% is above median relative to the S&P 500 Composite.
In addition to being above median relative to S&P 500 Composite, current annual total return performance through July, 2019 of 14.7% is at median relative to NuVasive Inc Peer Group.

Current 5-year total return performance of 12.2% is slightly above median relative to the S&P 500 Composite.
Through July, 2019, with slightly above median current 5-year total return of 12.2% relative to S&P 500 Composite, NuVasive’s total return performance is at the lower quartile relative to NuVasive Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, NUVA’s overall valuation is quite high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is above median. Price/equity ratio is slightly above median. The lowest factor, the ratio of enterprise value/revenue, is slightly above median.
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NuVasive has a major value gap compared to median valuation. For NUVA to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 3.44X to 2.07X. If NUVA’s ratio of enterprise value/revenue were to decline to 2.07X, its stock price would be lower by $-30 to $34.
For NUVA to achieve upper quartile valuation relative to the NuVasive Inc Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 3.44X to 6.12X. If NUVA’s ratio of enterprise value/revenue were to rise to 6.12X, its stock price would increase by $58 from the current level of $64.

VALUE TARGETS

With future capital returns forecasted to exceed the cost of capital, NUVA is expected to continue to be an important Value Builder.
NuVasive’s current Price Target of $53 represents a -17% change from the current price of $63.68.
This low appreciation potential results in an appreciation score of 29 (71% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 29, the high Power Rating of 79 results in an Value Trend Rating of C.
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NuVasive’s current Price Target is $53 (+11% from the 2018 Target of $47 but -17% from the 09/10/19 price of $63.68). This slight rise in the Target is the result of a +14% increase in the equity base and a -3% decrease in the price/equity multiple. The forecasted increase in cost of equity has a slight negative impact on the price/equity multiple and the forecasted decline in return on equity has a very slight negative impact as well. Partially offsetting these Drivers, the forecasted increase in growth has a slight positive impact.
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PTR’s return on equity forecast is 14.2% — in line with our recent forecasts. Forecasted return on equity enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is well above the 2012 low of 7%.

PTR’s growth forecast is 9.0% — slightly above our recent forecasts. Forecasted growth suffered a dramatic, steady decline between 2010 and 2018. The current forecast is significantly below the 2010 peak of 33%.

PTR’s cost of equity forecast is 8.5% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, variable decline between 2010 and 2018. The current forecast is below the 2010 peak of 10.6%.
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At NuVasive’s current price of $63.68, investors are placing a positive value of $32 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 7.0% per year, and a return on equity of 14.4% versus a cost of equity of 7.9%.
PTR’s 2020 Price Target of $53 is based on these forecasts and reflects an estimated value of existing assets of $31 and a value of future investments of $21.

About John Lafferty 54938 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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