Rating Update: Stock Rating F-Lowest (12/3/19)-SeaSpine Holdings Corp (SPNE).

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BUSINESS

SeaSpine Holdings Corporation, a medical technology company, focuses on the design, development, and commercialization of surgical solutions for the treatment of spinal disorders in the United States and internationally. The company provides orthobiologics and spinal implant solutions for the neurosurgeons and orthopedic spine surgeons to perform fusion procedures in the lumbar, thoracic, and cervical regions of the spine. Its orthobiologics products include demineralized bone matrices, collagen ceramic matrices, demineralized cancellous allograft bone products, and synthetic bone void fillers to enhance bone fusion rates in a range of orthopedic surgeries, including spine, hip, and extremities procedures. The company offers orthobiologics products in various forms, such as putties, pastes, strips, and resorbable mesh.
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INVESTMENT RATING

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SPNE is expected to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.

SeaSpine Holdings has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. SeaSpine Holdings has a poor Power Rating of 23 and a very low Appreciation Score of 14, leading to the Lowest Value Trend Rating.

SeaSpine Holdings’ stock is selling significantly above targeted value. The current stock price of $13.10 compares to targeted value 12 months forward of $6.
SeaSpine Holdings’ very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
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SeaSpine Holdings has a Power Rating of 23. (This poor Power Rating indicates that SPNE only has a better chance of achieving attractive investment performance over the near to intermediate term than 23% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in SPNE’s earnings estimates has been unfavorable in recent months; recent price action has been slightly unfavorable; and is in a slightly weakened position current.

INVESTMENT PROFILE

SPNE’s financial strength is low. Financial strength rating is 26.
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Relative to the S&P 500 Composite, SeaSpine Holdings Corp has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that SPNE is normal risk. Low financial leverage is a positive for SPNE. Relative weaknesses include: low historical profitability, low financial strength, low expected growth, and low historical growth. SPNE’s valuation is low: low dividend yield, low P/E ratio, and low price/book ratio. SPNE has unusually low market capitalization.

CURRENT SIGNALS

SeaSpine Holdings’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.

SeaSpine Holdings’ current technical position is mixed. The stock price is in a 2.6 month up move. The stock has appreciated 29.8% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent meaningful positive changes in investment behavior have benefitted SeaSpine Holdings Corp (NASDAQ: SPNE): the stock’s recent price rise disrupted its longer term downtrend.
The stock is currently rated F.
SeaSpine Holdings Corp (NASDAQ: SPNE) stock enjoyed a major increase of 37.6% on 12/3/19. The shares closed at $0.08. However, this advance was accompanied by unusually low trading volume at 66% of normal. Relative to the market the stock has been weak over the last nine months but has risen 1.8% during the last week.

CASH FLOW

In 2018, SeaSpine Holdings generated a very significant increase in cash of +$43.25 million (+401%). Sources of cash were much larger than uses. Cash consumed from 2018 EBITDA totaled -$24.25 million. Non-operating sources contributed +$1.55 million (-6% of EBITDA). Cash taxes consumed -$0.13 million (+1% of EBITDA). Re-investment in the business amounted to -$3.88 million (+16% of EBITDA). In 2018, debt investors had no impact on cash while equity investors furnished +$69.96 million (-289% of EBITDA).
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SeaSpine Holdings’ Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Seaspine Holdings Corp Peer Group. In most years, SeaSpine Holdings was in the top quartile. Currently, SeaSpine Holdings is slightly above median at -6% of EBITDA (+$1.55 million).

SeaSpine Holdings’ Cash Taxes, %EBITDA experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Seaspine Holdings Corp Peer Group. (Since 2016 Cash Taxes, %EBITDA has experienced a small recovery.) In most years, SeaSpine Holdings was in the top quartile. Currently, SeaSpine Holdings is upper quartile at +1% of EBITDA (-$0.13 million).

SeaSpine Holdings’ Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Seaspine Holdings Corp Peer Group. In most years, SeaSpine Holdings was in the second quartile. Currently, SeaSpine Holdings is below median at +16% of EBITDA (-$3.88 million).

SeaSpine Holdings’ Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Seaspine Holdings Corp Peer Group. In most years, SeaSpine Holdings was in the lower quartile. Currently, SeaSpine Holdings is above median at 0% of EBITDA ( $0.00 million).

SeaSpine Holdings’ Equity Investors, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Seaspine Holdings Corp Peer Group. (Since 2016 Equity Investors, %EBITDA has experienced a very sharp decline.) In most years, SeaSpine Holdings was in the lower quartile. Currently, SeaSpine Holdings is lower quartile at -289% of EBITDA (+$69.96 million).

SeaSpine Holdings’ Change in Cash, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Seaspine Holdings Corp Peer Group. (Since 2016 Change in Cash, %EBITDA has accelerated very sharply.) In most years, SeaSpine Holdings was in the top quartile. Currently, SeaSpine Holdings is lower quartile at -178% of EBITDA (+$43.25 million).
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SeaSpine Holdings’ Cash, %Revenue has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Seaspine Holdings Corp Peer Group. In most years, SeaSpine Holdings was in the third quartile. Currently, SeaSpine Holdings is above median at +38%.

PROFITABILITY

SeaSpine Holdings’ operating performance since 2009 is unavailable.
The productivity of SeaSpine Holdings’ assets remained stable over the full period 2009-2019: asset turnover has exhibited little to no overall change but it experienced very sharp improvement from the 2015 level.
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SeaSpine Holdings’ return on equity is substantially below median (-34.7%) for the four quarters ended September, 2019.
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Operating performance (pretax return on assets) is substantially below median (-26.6%) reflecting asset turnover that is upper quartile (1.03X) and below median pretax margin (-26.0%).
Tax “keep” rate (income tax management) is at the upper quartile (101.0%) resulting in after tax return on assets that is substantially below median.
Financial leverage (leverage) is at the lower quartile (1.29X).

GROWTH RATES

Overall, SeaSpine Holdings’ growth rate has slowed very considerably in recent years.
SeaSpine Holdings’ historical income statement and balance sheet growth are not available.

Annual revenue growth has been -6.7% per year.

Total asset growth has been -7.1% per year. (More recently it has been -11.8%.)

Annual E.P.S. growth is not available.

Equity growth has been -5.1% per year. (More recently it has been -12.3%.)
No consensus growth rate forecast is available for SeaSpine Holdings.
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Relative to the Seaspine Holdings Corp Peer Group, SeaSpine Holdings’ historical growth measures are generally third quartile. Revenue growth (-6.7%) has been substantially below median. Total asset growth (-7.1%) has been substantially below median. Equity growth (-5.1%) has been below median. E.P.S. growth is unavailable.

Consensus growth forecast is unavailable.
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PRICE HISTORY

Over the full time period, SeaSpine Holdings’ stock price performance has been highly stable and below market. Between September, 2015 and December, 2019, SeaSpine Holdings’ stock price fell -19%; relative to the market, this was a -50% loss. Significant price moves during the period: 1) November, 2016 – November, 2018: +181%; and 2) December, 2015 – November, 2016: -59%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -19.4% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through October, 2019 of -19.4% is slightly below median relative to SeaSpine Holdings Corp Peer Group.

Current 5-year total return performance is not available.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, SPNE’s overall valuation is normal. The highest factor, the ratio of enterprise value/assets, is slightly below median. Price/equity ratio is near the lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
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SeaSpine Holdings has a very large value gap compared to median valuation. For SPNE to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 1.45X to 0.94X. If SPNE’s ratio of enterprise value/revenue were to decline to 0.94X, its stock price would be lower by $-4 to $9.
For SPNE to achieve upper quartile valuation relative to the SeaSpine Holdings Corp Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.45X to 5.60X. If SPNE’s ratio of enterprise value/revenue were to rise to 5.60X, its stock price would increase by $33 from the current level of $13.

VALUE TARGETS

SPNE is expected to be a major Value Eraser reflecting capital returns that are forecasted to be below the cost of capital.
SeaSpine Holdings’ current Price Target of $6 represents a -51% change from the current price of $13.10.
SeaSpine Holdings’ very low appreciation potential results in an appreciation score of 14 (86% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 14, the low Power Rating of 23 contributes to an Value Trend Rating of F.
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SeaSpine Holdings’ current Price Target is $6 (-10% from the 2018 Target of $7 and -51% from the 12/03/19 price of $13.10). This slight fall in the Target is the result of a +4% increase in the equity base and a -14% decrease in the price/equity multiple. Each of the Value Drivers contributed to this decline in the price/equity multiple. The forecasted decline in return on equity has a large negative impact on the multiple. The forecasted increase in cost of equity also has a slight negative impact as did the increase in growth.
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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 2013 and 2018. The current forecast is significantly below the 2013 low of 4%.

PTR’s growth forecast is 4.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2013 and 2018. The current forecast is below the 2017 peak of 7%.

PTR’s cost of equity forecast is 4.4% — in line with recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2013 and 2018. The current forecast is steady at the 2013 low of 4.2%.
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At SeaSpine Holdings’ current price of $13.10, investors are placing a negative value of $-2 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 2.0% per year, and a return on equity of 4.0% versus a cost of equity of 4.2%.
PTR’s 2020 Price Target of $6 is based on these forecasts and reflects an estimated value of existing assets of $5 and a value of future investments of $1.

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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