BUSINESS
LivaNova PLC, a medical device company, designs, develops, manufactures, and sells therapeutic solutions worldwide. It operates through three segments: Cardiopulmonary, Neuromodulation, and Advanced Circulatory Support. The Cardiopulmonary segment develops, produces, and sells cardiopulmonary products, including oxygenators, heart-lung machines, autotransfusion systems, perfusion tubing systems, cannulae, connect, and other related products. The Neuromodulation segment designs, develops, and markets VNS Therapy System, an implantable device that delivers vagus nerve stimulation (VNS) therapy for the treatment of drug-resistant epilepsy, difficult-to-treat depression, and obstructive sleep apnea. It is also involved in the development and clinical testing of the VITARIA System for treating heart failure through VNS.
INVESTMENT RATING
Reflecting future returns on capital that are forecasted to be above the cost of capital, LIVN is expected to continue to be an important Value Builder.
LivaNova 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 inconsistent signals. LivaNova has a neutral Power Rating of 40 but a poor Appreciation Score of 23, triggering the Lowest Value Trend Rating.
LivaNova’s stock is selling significantly above targeted value. The current stock price of $56.82 compares to targeted value 12 months forward of $37.
LivaNova’s low appreciation potential results in an appreciation score of 23 (77% of the universe has greater appreciation potential.)
LivaNova has a Power Rating of 40. (This neutral Power Rating indicates that LIVN’s chances of enjoying attractive investment performance over the near to intermediate term are only average.)
Factors contributing to this neutral Power Rating include: the Electromedical Apparatus comparison group is in an extremely unfavorable position currently; and recent price action has been neutral. An offsetting factor is earnings estimate behavior for LIVN has been slightly favorable recently.
INVESTMENT PROFILE
LIVN’s financial strength is low. Financial strength rating is 26.
Relative to the S&P 500 Composite, LivaNova PLC has slightly more Value than Growth characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that LIVN is higher risk. Relative weaknesses include: low historical profitability, low financial strength, low expected growth, and high earnings variability. LIVN’s valuation is moderate: low dividend yield, moderate P/E ratio, and moderate price/book ratio. LIVN has unusually low market capitalization.
CURRENT SIGNALS
LivaNova’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.
LivaNova’s current technical position is mixed. The stock price is in a 4.0 month down move. The stock has declined 19.1% from its prior high. The 200 day moving average is in an uptrend. The stock price is below its 200 day moving average. The stock has just risen above its 200 day moving average.
ALERTS
Significant positive changes in investment behavior have recently occurred for LivaNova PLC (NASDAQ: LIVN): the stock rose on very heavy volume.
In light of this new information we are reviewing our current Overall Rating of F. This review will be completed in the next several days.
LivaNova PLC (NASDAQ: LIVN) has reported earnings for its fourth fiscal quarter (ending December 31) of $0.30 versus $0.03 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $0.33 versus $-1.61 for the same period a year ago.
LivaNova PLC (NASDAQ: LIVN) stock enjoyed a very large increase of 8.0% on 2/21/24. The shares closed at $56.82. Moreover, trading volume in this advance was exceptionally high at 318% of normal. The stock has performed in line with the market over the last nine months and has risen 12.1% during the last week.
CASH FLOW
In 2022, LivaNova PLC generated a very significant increase in cash of +$307.6 million (+148%). Sources of cash were much larger than uses. Cash generated from 2022 EBITDA totaled +$105.4 million. Non-operating uses consumed -$84.8 million (-80% of EBITDA). Cash taxes consumed -$10.3 million (-10% of EBITDA). Withdrawal of investment from the business totaled +$52.6 million (+50% of EBITDA). On a net basis, debt investors furnished +$245.5 million (+233% of EBITDA) while equity investors received -$0.8 million (-1% of EBITDA).
LivaNova PLC’s Non-operating Income, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Livanova Plc Peer Group. (Since 2020 Non-operating Income, %EBITDA has experienced a very sharp recovery.) In most years, LivaNova PLC was in the lower quartile and second quartile. Currently, LivaNova PLC is lower quartile at -80% of EBITDA (-$84.8 million).
LivaNova PLC’s Cash Taxes, %EBITDA experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Livanova Plc Peer Group. (Since 2020 Cash Taxes, %EBITDA has experienced a very sharp recovery.) In most years, LivaNova PLC was in the lower quartile and top quartile. Currently, LivaNova PLC is at median at -10% of EBITDA (-$10.3 million).
LivaNova PLC’s Business Re-investment, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Livanova Plc Peer Group. (Since 2020 Business Re-investment, %EBITDA has experienced a very sharp decline.) In most years, LivaNova PLC was in the top quartile and lower quartile. Currently, LivaNova PLC is upper quartile at +50% of EBITDA (+$52.6 million).
LivaNova PLC’s Debt Investors, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by a downtrend for the Livanova Plc Peer Group. In most years, LivaNova PLC was in the top quartile and second quartile. Currently, LivaNova PLC is upper quartile at +233% of EBITDA (+$245.5 million).
LivaNova PLC’s Equity Investors, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Livanova Plc Peer Group. In most years, LivaNova PLC was in the top quartile and lower quartile. Currently, LivaNova PLC is upper quartile at -1% of EBITDA (-$0.8 million).
LivaNova PLC’s Change in Cash, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by stability for the Livanova Plc Peer Group. In most years, LivaNova PLC was in the top quartile and lower quartile. Currently, LivaNova PLC is upper quartile at +292% of EBITDA (+$307.6 million).
LivaNova PLC’s Cash, %Revenue has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Livanova Plc Peer Group. In most years, LivaNova PLC was in the second quartile and top quartile. Currently, LivaNova PLC is at the upper quartile at +50%.
PROFITABILITY
LivaNova PLC’s return on equity has eroded very significantly since 2013. The current level is 0.2% versus the high of 21.2% and the low of -30.7%.
This very significant erosion was due to very strong negative trend in pretax operating return and strong negative trend in non-operating factors.
The productivity of LivaNova PLC’s assets declined over the full period 2013-2023: asset turnover has suffered an downtrend.
Reinforcing this trend, pretax margin experienced a strong overall downtrend but it experienced a very sharp recovery after the 2020 low.
Non-operating factors (income taxes and financial leverage) had a significant negative influence on return on equity.
LivaNova PLC’s return on equity is lower quartile (0.2%) for the four quarters ended September, 2023.
Operating performance (pretax return on assets) is lower quartile (0.8%) reflecting asset turnover that is at median (0.48X) and lower quartile pretax margin (1.7%).
Tax “keep” rate (income tax management) is lower quartile (14.8%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is above median (1.90X).
GROWTH RATES
Overall, LivaNova PLC’s growth rate has slowed very considerably in recent years.
LivaNova PLC’s historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.
Annual revenue growth has been 6.7% per year. (More recently it has been -2.8%.)
Total asset growth has been 10.8% per year. (More recently it has been -4.4%.)
Annual E.P.S. growth has been 2.4% per year.
Equity growth has been 4.6% per year. (More recently it has been -7.8%.)
No consensus growth rate forecast is available for LivaNova PLC.
Relative to the Livanova Plc Peer Group, LivaNova PLC’s historical growth measures are erratic. Revenue growth (6.7%) has been upper quartile. Total asset growth (10.8%) has been upper quartile. Equity growth (4.6%) has been slightly above median. E.P.S. growth (2.4%) has been at the lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, LivaNova PLC’s stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, LivaNova PLC’s stock price rose +31%; relative to the market, this was a -58% loss. Significant price moves during the period: 1) December, 2021 – March, 2023: -50%; and 2) November, 2016 – August, 2018: +184%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -13.4% 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 January, 2024 of -13.4% is below median relative to LivaNova PLC Peer Group.
Current 5-year total return performance of -12.0% is lower quartile relative to the S&P 500 Composite.
Through January, 2024, with lower quartile current 5-year total return of -12.0% relative to S&P 500 Composite, LivaNova PLC’s total return performance is lower quartile relative to LivaNova PLC Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, LIVN’s overall valuation is 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 slightly above median. Ratio of enterprise value/revenue is slightly below median. The lowest factor, the price/equity ratio, is below median.
Relative to LivaNova PLC Peer Group, LIVN’s overall valuation is quite high. The highest factor, the price/earnings ratio, is upper quartile. Price/equity ratio is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is upper quartile. Ratio of enterprise value/assets is upper quartile. The lowest factor, the ratio of enterprise value/revenue, is at the upper quartile.
LivaNova PLC has a very large value gap compared to the median valuation. For LIVN to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 3.29X to 2.64X. If LIVN’s ratio of enterprise value/revenue were to fall to 2.64X, its stock price would be lower by $-13 to $43.
For LIVN to fall to lower quartile valuation relative to the LivaNova PLC Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 3.29X to 2.31X. If LIVN’s ratio of enterprise value/revenue were to fall to 2.31X, its stock price would decline by $-20 from the current level of $57.
VALUE TARGETS
Reflecting future returns on capital that are forecasted to be above the cost of capital, LIVN is expected to continue to be an important Value Builder.
LivaNova PLC’s current Price Target of $37 represents a -35% change from the current price of $56.82.
LivaNova’s low appreciation potential results in an appreciation score of 23 (77% of the universe has greater appreciation potential.)
With this low Appreciation Score of 23, the neutral Power Rating of 40 results in an Value Trend Rating of F.
LivaNova PLC’s current Price Target is $37 (-6% from the 2022 Target of $39 and -35% from the 02/21/24 price of $56.82). This plateau in the Target is the result of a -10% decrease in the equity base and a +5% increase in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a very large positive impact on the price/equity multiple. The forecasted growth has no impact. The forecasted increase in cost of equity has a very large negative impact.
PTR’s return on equity forecast is 15.5% — above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2014 and 2022. The current forecast is well above the 2020 low of 6%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, variable decline between 2014 and 2022. The current forecast is significantly below the 2015 peak of 20%.
PTR’s cost of equity forecast is 8.8% — slightly above recent levels. Forecasted cost of equity enjoyed a dramatic, erratic decline between 2014 and 2022. The current forecast is above the 2015 low of 5.6%.
At LivaNova PLC’s current price of $56.82, investors are placing a positive value of $3 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 7.8% versus a cost of equity of 4.7%.
PTR’s 2024 Price Target of $37 is based on these forecasts and reflects an estimated value of existing assets of $40 and a value of future investments of $-3.
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