Zacks_Analysts' Blog : Masimo Stays at Neutral - Analyst Blog

We maintain our Neutral rating on Masimo (MASI). Second-quarter fiscal 2011 earnings of 28 cents matched the Zacks Consensus Estimate.

Masimo’s SET offering may help it become a dominant global player in the pulse oximetry market. The addition of non-invasive parameters is expected to act as a long-term barrier to entry and drive substantial growth. The expanded pulse oximetry utilization into non-critical care areas of hospital represents another growth driver. Shipments have been growing at a steady rate fueled by new contracts. Moreover, recurring revenues from sale of consumables are increasing. Recurring revenue is driven by steady growth in the installed base of the company. 

Masimo’s products enjoy large potential market size. The Masimo SET targets a critical care and general floor market each estimated by some at about $1 billion. The Rainbow SET is similarly aimed at a large market. The international arena is another burgeoning opportunity for the company. Its multi-year investment to build an international sales organization continues to gather strength.   

On the negative side, a weak macro environment raises concern and competition remains intense. Moreover, Masimo partly depends upon its Original Equipment Manufacturers (“OEM”) partners for a part of its sales. In conclusion, its valuation, which already factors in its robust growth prospects, offers limited upside potential at this time.

The earlier renewal of the royalty agreement with Covidien (COV) provides impetus albeit at lower rates. Masimo announced, on June 15, 2011, a non-exclusive, long-term agreement with Philips (PHG), under which, Philips will utilize Masimo’s Rainbow SET know-how. Masimo anticipates that it will launch future joint development efforts. Subsequently, Philips products will integrate Masimo’s Rainbow SET technology. Our Neutral rating on Masimo is backed by ashort-term Zacks #3 Rank (Hold).