Rating Update: Stock Rating C-Neutral (12/3/19)-Apyx Medical Corp (APYX).

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BUSINESS

Bovie Medical Corporation, a medical device company, develops, manufactures, and markets electrosurgical devices and technologies, and related medical products used in doctor’s offices, surgery centers, and hospitals worldwide. The company provides electrosurgical products, including desiccators, generators, electrodes, electrosurgical pencils, and various ancillary disposable products used during surgical procedures in gynecology, urology, plastic surgery, dermatology, veterinary, and other surgical markets for the cutting and coagulation of tissue. It also offers electrosurgical disposables comprising Resistick II, a proprietary coating applied to stainless steel that resist eschar during surgery; and disposable laparoscopic electrodes for use by physicians in the areas of gynecology, general surgery, and urology.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to be below the cost of capital, APYX is expected to be a major Value Eraser.

Apyx Medical 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. Apyx Medical has a very low Appreciation Score of 10 but a very high Power Rating of 91, triggering the Neutral Value Trend Rating.

Apyx Medical’s stock is selling significantly above targeted value. The current stock price of $7.33 compares to targeted value 12 months forward of $3.
Apyx Medical’s very low appreciation potential results in an appreciation score of 10 (90% of the universe has greater appreciation potential.)
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Apyx Medical has a Power Rating of 91. (This very high Power Rating indicates that APYX has a better chance of achieving attractive investment performance over the near to intermediate term than all but 9% of companies in the universe.)
Factors contributing to this very high Power Rating include: the recent trend in APYX’s earnings estimates has been extremely favorable; and recent price action has been extremely favorable. An offsetting factor is is in a slightly weakened position current.

INVESTMENT PROFILE

APYX’s financial strength is low. Financial strength rating is 22.
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Relative to the S&P 500 Composite, Apyx Medical Corp has both Growth and Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that APYX is higher risk. Relative weaknesses include: low historical profitability, low financial strength, and high earnings variability. APYX’s valuation is high: low dividend yield, high P/E ratio, and moderate price/book ratio. APYX has unusually low market capitalization.

CURRENT SIGNALS

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

Apyx Medical’s current technical position is very strong. The stock price is in a 7.7 month up move. The stock has appreciated 108.9% from its prior low. The stock price is above its 200 day moving average which is in an uptrend. The 200 day moving average has just turned up.

ALERTS

Apyx Medical Corp (NASDAQ: APYX) has recently enjoyed meaningful positive changes in investment behavior. Positive developments: its shorter term price trend turned up, and its longer term price trend turned up. Negative development: negative upside/downside volume developed.
Meaningful positive changes in fundamentals have recently occurred for Apyx Medical Corp (NASDAQ: APYX): the stock’s power rating rose above 70, and significant quarterly sales acceleration occurred.
The stock is currently rated C.
Apyx Medical Corp (NASDAQ: APYX) stock suffered a major decline of -22.0% on 12/3/19. The shares closed at $0.00. However, trading volume in this decline was unusually low at 64% of normal. The stock has been exceptionally strong relative to the market over the last nine months and has risen 3.8% during the last week.

CASH FLOW

In 2018, Apyx Medical generated a very significant increase in cash of +$67.48 million (+633%). Sources of cash were much larger than uses. Cash consumed from 2018 EBITDA totaled -$12.19 million. Non-operating uses consumed -$0.31 million (+3% of EBITDA). Cash taxes contributed +$3.41 million (-28% of EBITDA). Withdrawal of investment from the business totalled +$4.13 million (-34% of EBITDA). On a net basis, debt investors removed -$2.80 million (+23% of EBITDA) while equity investors contributed +$75.23 million (-617% of EBITDA).
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Apyx Medical’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Apyx Medical Corp Peer Group. In most years, Apyx Medical was in the top quartile and second quartile. Currently, Apyx Medical is slightly above median at +3% of EBITDA (-$0.31 million).

Apyx Medical’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Apyx Medical Corp Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a very sharp decline.) In most years, Apyx Medical was in the lower quartile and top quartile. Currently, Apyx Medical is lower quartile at -28% of EBITDA (+$3.41 million).

Apyx Medical’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 Apyx Medical Corp Peer Group. (Since 2015 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, Apyx Medical was in the lower quartile and third quartile. Currently, Apyx Medical is substantially below median at -34% of EBITDA (+$4.13 million).

Apyx Medical’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Apyx Medical Corp Peer Group. (Since 2014 Debt Investors, %EBITDA has experienced a very sharp recovery.) In most years, Apyx Medical was in the second quartile and top quartile. Currently, Apyx Medical is above median at +23% of EBITDA (-$2.80 million).

Apyx Medical’s Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Apyx Medical Corp Peer Group. In most years, Apyx Medical was in the lower quartile and top quartile. Currently, Apyx Medical is lower quartile at -617% of EBITDA (+$75.23 million).

Apyx Medical’s Change in Cash, %EBITDA has experienced a volatile overall uptrend over the period. This improvement was accompanied by stability for the Apyx Medical Corp Peer Group. In most years, Apyx Medical was in the lower quartile and top quartile. Currently, Apyx Medical is lower quartile at -554% of EBITDA (+$67.48 million).
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Apyx Medical’s Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Apyx Medical Corp Peer Group. In most years, Apyx Medical was in the third quartile and second quartile. Currently, Apyx Medical is upper quartile at +468%.

PROFITABILITY

Apyx Medical’s return on equity has eroded very significantly since 2009.
This very significant erosion was due to very strong negative trend in pretax operating return and very strong negative trend in non-operating factors.
The productivity of Apyx Medical’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend but it recently stabilized from the 2015 level.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
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Apyx Medical’s return on equity is slightly below median (-22.5%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is lower quartile (-21.3%) reflecting asset turnover that is lower quartile (0.30X) and lower quartile pretax margin (-72.0%).
Tax “keep” rate (income tax management) is lower quartile (93.1%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is lower quartile (1.13X).

GROWTH RATES

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

Annual revenue growth has been -8.0% per year.

Total asset growth has been 1.7% per year.

Annual E.P.S. growth has been 53.2% per year.

Equity growth has been 3.1% per year.
No consensus growth rate forecast is available for Apyx Medical.
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Relative to the Apyx Medical Corp Peer Group, Apyx Medical’s historical growth measures are highly erratic. E.P.S. growth (53.2%) has been at the upper quartile. Equity growth (3.1%) has been at median. Total asset growth (1.7%) has been slightly below median. Revenue growth (-8.0%) has been lower quartile.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, Apyx Medical’s stock price performance has been volatile and significantly below market. Between February, 2009 and December, 2019, Apyx Medical’s stock price rose +8%; relative to the market, this was a -74% loss. Significant price moves during the period: 1) January, 2018 – September, 2018: +198%; 2) October, 2016 – May, 2017: -62%; 3) May, 2016 – October, 2016: +247%; 4) November, 2013 – May, 2014: +120%; and 5) July, 2009 – October, 2010: -79%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of 25.2% 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 October, 2019 of 25.2% is upper quartile relative to Apyx Medical Corp Peer Group.

Current 5-year total return performance of 10.9% is at median relative to the S&P 500 Composite.

Through October, 2019, with current 5-year total return of 10.9% relative to S&P 500 Composite at median, Apyx Medical’s total return performance is at median relative to Apyx Medical Corp Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, APYX’s overall valuation is quite high. The highest factor, the ratio of enterprise value/revenue, is upper quartile. Ratio of enterprise value/assets is above median. Price/equity ratio is slightly below median. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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Apyx Medical has a major value gap compared to the median valuation. For APYX to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 8.42X to 2.93X. If APYX’s ratio of enterprise value/revenue were to fall to 2.93X, its stock price would be lower by $-4 to $4.
For APYX to fall to lower quartile valuation relative to the Apyx Medical Corp Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 8.42X to 1.22X. If APYX’s ratio of enterprise value/revenue were to fall to 1.22X, its stock price would decline by $-5 from the current level of $7.33.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to be below the cost of capital, APYX is expected to be a major Value Eraser.
Apyx Medical’s current Price Target of $3 represents a -59% change from the current price of $7.33.
Apyx Medical’s very low appreciation potential results in an appreciation score of 10 (90% of the universe has greater appreciation potential.)
Notwithstanding this low Appreciation Score of 10, the high Power Rating of 91 results in an Value Trend Rating of C.
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Apyx Medical’s current Price Target is $3 (+39% from the 2018 Target of $2 but -59% from the 12/03/19 price of $7.33). This dramatic rise in the Target is the result of a +39% increase in the equity base and a +0% change in the price/equity multiple. None of the Value Drivers has an impact on the price/equity multiple. The forecasted increase in growth has no impact on the multiple. The forecasted increase in cost of equity also has no impact and the decline in return on equity didn’t either.
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PTR’s return on equity forecast is -10.% — significantly below our recent forecasts. Forecasted return on equity erratic but little changed between 2010 and 2018. The current forecast is significantly below the 2014 peak of 611%.

PTR’s growth forecast is 27.0% — substantially above our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly above the 2017 low of 2%.

PTR’s cost of equity forecast is 6.7% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic decline between 2010 and 2018. The current forecast is above the 2015 low of 3.7%.
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At Apyx Medical’s current price of $7.33, investors are placing a positive value of $0 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 8.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.9%.
PTR’s 2020 Price Target of $3 is based on these forecasts and reflects an estimated value of existing assets of $1 and a value of future investments of $2.

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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