Zacks_Analysts' Blog : Masimo Remains Neutral - Analyst Blog

We reiterate our rating on Masimo (MASI) at Neutral. Its third quarter earnings per share of 24 cents missed the Zacks Consensus Estimate by four cents. Revenues of $104 million were lower than the Zacks Consensus Estimate of $109 million.

Masimo’s Signal Extraction Technology (“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.

The company’s products enjoy large potential market size. The Masimo SET targets a critical care and general floor market; each estimated at about $1 billion. The Rainbow SET is also 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.  

Masimo is well positioned to deliver healthy growth over the next few years with an increasing proportion of recurring revenues (coming from sale of consumables). Recurring revenues are driven by steady growth in the installed base of the company. 

The renewal of the royalty agreement with Covidien (COV), but under fresh terms, has reduced royalty receipt in recent quarters. Also on the negative side, a weak macro environment raises concern and competition remains intense. Moreover, Masimo partly depends upon its OEM partners for sales.

The company’s current valuation reflects high short-term expectations from its hemoglobin monitoring technology. However, in reality, uptake of the hemoglobin monitoring device may be uneven.

Masimo already enjoys a high valuation. The stock is expensive, which reflects its robust growth prospects. As a result, we anticipate limited upside to the share price from current levels. We are currently Neutral on the stock. The stock currently retains a Zacks #4 Rank, which translates into a short-term “Sell” recommendation.