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GMED
Mesfin Symons and Andrew Shaw
Stock Summary
• NYSE:GMED
• Sector: Health Care
• Industry: Medical Supplies & Devices
• Market Cap: $2.02B
• 52Weeks low: $19.25
• 52Weeks High: $28.6
• Current Price: $21.30
• Recommend: HOLD
• Price target: $23.88
• 12.12% upside
Overview
• HeadquarterAudubon, PA.
• Over 1,200 Employees
• Founded in 2003
• Operates in USA and Internationally
• Revenue: $544.75 Million
• P/E: 17.97
• P/B: 2.69
• P/S: 3.8
• D/E: 0%
• Beta : 0.64
InvestmentThesis
• Increasing margins by manufacturing own products
• Entering new high-growth markets
• Robust product pipeline
Corporate Governance
• David Paul – CEO
• Founded: GMED
• Steven Payne – CAO
• Been with company since it went public in 2012
• DanielT. Scavilla - CFO
• Worked for J&J 28 years
• Previous positionVP of Finance
1Year Performance
Revenue by Segments
• Innovative fusion: $288,062 m
• 53.17%
• DisruptiveTechnology: $226,691 m
• 46.83%
Geographic Revenue
• US – 91%
• Y/Y growth: 16.64%
• International: 9%
• Y/Y growth: -1.52%
• Y/Y growth consistent currency: 10.2%
Geographic Revenue
US International
Segments
• Innovative Fusions
• DisruptiveTechnology
Innovative Fusions
• Traditional implants
• Deformity
• Trauma conditions
DisruptiveTechnology
• Minimally invasive surgeries
• Motion preservation
• Bone void filler
• Robotics
Distribution Model
• Corporate sales to doctors/hospitals
• Independent sales reps
• Hire from other companies
• Training
Industry Growth Drivers
• Favorable population demographic
• Increasing population
• Increased spending on healthcare
Financials Metrics
Metric GMED ZBH JNJ MDT SYK Industry
Gross Margin 75.41% 65.39% 68.15% 68.77% 67.03% 64.87%
Operating Margin 31.64% 11.04% 14.71% 19.89% 33.51% 11.41%
Net Margin 26.37% 6.55% 18.05% 14.58% 19.23% 7.25%
P/E 18.13 111.92 20.24 31.88 26.94 41.42
P/B 2.74 2.56 4.36 2.23 4.7 3.84
P/S 3.87 3.25 4.41 3.94 4.09 3.32
D/E 0% 116.87% 27.92% 60.00% 46.97% 25.07%
Consolidated Balance Sheets - USD ($) $ in
Thousands
Sep. 30,
2016
Dec. 31,
2015
ASSETS
Cash and cash equivalents $
90,192
$
60,152
Restricted cash 477 26,119
Short-term marketable securities 167,727 220,877
Accounts receivable, net of allowances of
$2,694 and $2,513, respectively
86,708 77,681
Inventories 115,606 105,260
Prepaid expenses and other current assets 11,605 7,351
Income taxes receivable 5,895 8,672
Deferred income taxes 0 38,687
Total current assets 478,210 544,799
Property and equipment, net of accumulated
depreciation of $159,314 and $139,114,
respectively
127,084 114,743
Long-term marketable securities 64,451 48,762
Note receivable 25,000 0
Intangible assets, net 67,438 33,242
Goodwill 110,250 91,964
Other assets 1,015 590
Deferred income taxes 28,295 0
Total assets 901,743 834,100
LIABILITIES AND EQUITY
Accounts payable 13,936 15,971
Accrued expenses 43,287 53,769
Income taxes payable 3,696 763
Business acquisition liabilities, current 4,888 12,188
Total current liabilities 65,807 82,691
Business acquisition liabilities, net of current
portion
15,020 21,126
Deferred income taxes 9,013 13,260
Other liabilities 1,784 1,699
Total liabilities 91,624 118,776
Commitments and contingencies (Note 13)
Equity:
Additional paid-in capital 207,182 192,629
Accumulated other comprehensive loss (1,760) (1,958)
Retained earnings 604,601 524,558
Total equity 810,119 715,324
Total liabilities and equity 901,743 834,100
Class A Common
Equity:
Common stock 72 71
Income Statement
Consolidated Statements of Income - USD ($) shares in Thousands, $
in Thousands
12 Months Ended
Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013
Income Statement [Abstract]
Sales $ 544,753 $ 474,371 $ 434,459
Cost of goods sold 132,803 110,857 100,343
Gross profit 411,950 363,514 334,116
Operating expenses:
Research and development 36,982 31,687 26,870
Selling, general and administrative 214,014 187,798 182,518
Provision for litigation (11,268) 5,667 23,055
Total operating expenses 239,728 225,152 232,443
Operating income 172,222 138,362 101,673
Interest income, net 1,304 805 467
Foreign currency transaction loss (1,159) (899) (804)
Other income 438 374 665
Other income, net 583 280 328
Income before income taxes 172,805 138,642 102,001
Income tax provision 60,021 46,157 33,389
Net income $ 112,784 $ 92,485 $ 68,612
Earnings per share:
Basic $ 1.19 $ 0.98 $ 0.74
Diluted $ 1.17 $ 0.97 $ 0.73
Weighted average shares outstanding:
Basic 95,046 94,227 92,647
Competitors
Competitors
Spinal inmplant revenue growth
2015 2014
GMED 14.84% 9.19%
ZBH 95.17% 2.42%
JNJ -5.52% 0.22%
MDT -1.58% -2.30%
SYK 0.00% -0.40%
EPS Growth
2015 2014
GMED 21.43% 32.43%
ZBH -81.69% -7.39%
JNJ -4.14% 17.89%
MDT -1.58% -2.30%
SYK 2.40% -0.48%
YTD Performance
GMED -20.45%
ZBH 3.44%
JNJ 15.21%
MDT 8.24%
SYK 25.34%
% of Revenue from Spinal Implants
GMED 100%
ZBH 6.74%
JNJ 5.57%
MDT 10.14%
SYK 7.40%
R&D
R&D Spending as %
2015 2014 2013
GMED 6.79% 6.68% 6.18%
ZBH 4.48% 4.00% 4.39%
JNJ 12.91% 11.43% 11.47%
MDT 7.70% 8.10% 8.70%
SYK 6.20% 6.35% 5.90%
Number of spinal products
GMED 150
ZBH 50
JNJ 39
MDT 14
SYK 47
Risks
• Sale force
• Larger competitors
• Currency exchange
• Disruptive segment
• FDA
• Product expectance
• Obsolete inventory
Why GMED
• Superior margin vs their competitors and plan to increase
• Robust pipeline
• Recent entrance into high-growth market
Q3 Performance
• EPS: $0.29
• EPS: $0.29
• Revenue: $135.75m (-0.9%Y/Y)
• $-3.95m
• U.S. -4.1%
• International Sale Increased: 34.1%
• Completed acquisition of Alphatec’s
• 1% worldwide decreased
Full year Guidance: 2016
• Revenue: $560m
• -2.8%
• 2017 full year sales of $625m
• -2.34%
• EPS: $1.13
• -3.42%
• Increased Spending: Robotics and trauma.
• Launched 7 new products, total of 15 2016
Analyst Overview
• Strong Buy: 2
• Buy: 4
• Hold : 5
• Sell: 1
• Strong Sell: 0
• PriceTarget Range: $23- $30
• Average PriceTarget: $26.33
Historical Financial Data
HISTORICAL FINANCIAL DATA2011 2012 2013 2014 2015 LTM 5Yr. Avg.
Revenue Growth Rate % 16.4% 12.6% 9.2% 14.8% NA 13.3%
Operating Margin 29.4% 29.7% 23.5% 29.2% 31.6% 31.4% 28.7%
EffectiveTax Rate 37.3% 35.6% 32.7% 33.3% 34.7% 34.0% 34.7%
Depreciation & Amortization as
% of Revenue
5.1% 4.7% 4.5% 4.6% 4.4% 5.0% 4.7%
Capital Expenditures as % of
Revenue
6.8% 6.4% 5.5% 5.2% 9.3% 7.4% 6.6%
NWC as % of Revenue 34.6% 37.8% 40.0% 45.5% 48.4% 85.8% 41.3%
Assumptions
GLOBAL ASSUMPTIONS
Shares Outstanding (Millions)
96
Risk Free
Rate
2.07%
Current Price per Share $21.30 Beta
0.62
52Week Low $ 21.15
Credit
Rating
52Week High $28.60
Cost of
Debt
1.28%
Analyst Low $23.00
Terminal Shares
Out (Millions) 96
Analyst High $30.00
Market
Rate
9.00%
WACC CalculationsCAPM
Risk Free Rate 2.07%
Market Rate 9.00%
Beta 0.62
Cost of Equity (CAPM) 6.37%
Cost of Debt
Using Credit Rating 0
Cost of Debt used in WACC 1.28%
Cost of Debt used in WACC 1.28%
Tax Rate 34.03%
Shares Outstanding 96
Price per Share 21.30
Market Capitalization 2,038
Cash + ShortTerm
Investments
257
BookValue of LongTerm
Debt
-
WACC 6.37%
Base Case
BASE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020F
Revenue Growth Rate 3.0% 3.0% 3.3% 3.3% 3.3%
Operating Margin 27.0% 27.0% 27.0% 29.0% 29.0%
EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0%
Capital Expenditures as % of
Revenue
8.0% 8.0% 8.0% 8.0% 8.0%
Depreciation & Ammortization
as % of Revenue
4.5% 4.5% 4.5% 4.5% 8.0%
NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%
Terminal Growth Rate 1.5%
Upside
UPSIDE CASE
ASSUMPTIONS
2016F 2017F 2018F 2019F 2020F
Revenue Growth Rate 3.5% 4.0% 4.0% 4.0% 4.0%
Operating Margin 29.0% 29.0% 29.0% 31.0% 31.0%
EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0%
Capital Expenditures as % of
Revenue
8.0% 8.0% 8.0% 8.0% 8.0%
Depreciation & Ammortization
as % of Revenue
4.5% 4.5% 4.5% 4.5% 8.0%
NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%
Terminal Growth Rate 1.5%
Downside
DOWNSIDE CASE
ASSUMPTIONS
2016F 2017F 2018F 2019F 2020F
Revenue Growth Rate 2.0% 2.0% 2.0% 2.0% 2.0%
Operating Margin 24.0% 24.0% 24.0% 26.0% 26.0%
EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0%
Capital Expenditures as % of
Revenue
8.0% 8.0% 8.0% 8.0% 8.0%
Depreciation & Ammortization
as % of Revenue
4.5% 4.5% 4.5% 4.5% 8.0%
NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0%
Terminal Growth Rate 1.5%
DCF Output
Scenario Base Upside Downside
Terminal Shares
Outstanding 96 96
9
6
PV ofTotalCash
Flow 2,073
2,
276
1,78
8
Value of Debt
- -
-
Value of Cash
257 257
25
7
Value of Equity
2,330
2,
534
2,04
5
Value of Equity
per Share
$
24.35
$ 2
6.48
$ 21.3
7
Potential Upside 14.32% 24.30% 0.35%
Weight 50% 20% 30%
Target Price
$
23.88
Upside/Downsid
e
12.12%
Questions?

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GMED

  • 2. Stock Summary • NYSE:GMED • Sector: Health Care • Industry: Medical Supplies & Devices • Market Cap: $2.02B • 52Weeks low: $19.25 • 52Weeks High: $28.6 • Current Price: $21.30 • Recommend: HOLD • Price target: $23.88 • 12.12% upside
  • 3. Overview • HeadquarterAudubon, PA. • Over 1,200 Employees • Founded in 2003 • Operates in USA and Internationally • Revenue: $544.75 Million • P/E: 17.97 • P/B: 2.69 • P/S: 3.8 • D/E: 0% • Beta : 0.64
  • 4. InvestmentThesis • Increasing margins by manufacturing own products • Entering new high-growth markets • Robust product pipeline
  • 5. Corporate Governance • David Paul – CEO • Founded: GMED • Steven Payne – CAO • Been with company since it went public in 2012 • DanielT. Scavilla - CFO • Worked for J&J 28 years • Previous positionVP of Finance
  • 7. Revenue by Segments • Innovative fusion: $288,062 m • 53.17% • DisruptiveTechnology: $226,691 m • 46.83%
  • 8. Geographic Revenue • US – 91% • Y/Y growth: 16.64% • International: 9% • Y/Y growth: -1.52% • Y/Y growth consistent currency: 10.2% Geographic Revenue US International
  • 9. Segments • Innovative Fusions • DisruptiveTechnology
  • 10. Innovative Fusions • Traditional implants • Deformity • Trauma conditions
  • 11. DisruptiveTechnology • Minimally invasive surgeries • Motion preservation • Bone void filler • Robotics
  • 12. Distribution Model • Corporate sales to doctors/hospitals • Independent sales reps • Hire from other companies • Training
  • 13. Industry Growth Drivers • Favorable population demographic • Increasing population • Increased spending on healthcare
  • 14. Financials Metrics Metric GMED ZBH JNJ MDT SYK Industry Gross Margin 75.41% 65.39% 68.15% 68.77% 67.03% 64.87% Operating Margin 31.64% 11.04% 14.71% 19.89% 33.51% 11.41% Net Margin 26.37% 6.55% 18.05% 14.58% 19.23% 7.25% P/E 18.13 111.92 20.24 31.88 26.94 41.42 P/B 2.74 2.56 4.36 2.23 4.7 3.84 P/S 3.87 3.25 4.41 3.94 4.09 3.32 D/E 0% 116.87% 27.92% 60.00% 46.97% 25.07%
  • 15. Consolidated Balance Sheets - USD ($) $ in Thousands Sep. 30, 2016 Dec. 31, 2015 ASSETS Cash and cash equivalents $ 90,192 $ 60,152 Restricted cash 477 26,119 Short-term marketable securities 167,727 220,877 Accounts receivable, net of allowances of $2,694 and $2,513, respectively 86,708 77,681 Inventories 115,606 105,260 Prepaid expenses and other current assets 11,605 7,351 Income taxes receivable 5,895 8,672 Deferred income taxes 0 38,687 Total current assets 478,210 544,799 Property and equipment, net of accumulated depreciation of $159,314 and $139,114, respectively 127,084 114,743 Long-term marketable securities 64,451 48,762 Note receivable 25,000 0 Intangible assets, net 67,438 33,242 Goodwill 110,250 91,964 Other assets 1,015 590 Deferred income taxes 28,295 0 Total assets 901,743 834,100 LIABILITIES AND EQUITY Accounts payable 13,936 15,971 Accrued expenses 43,287 53,769 Income taxes payable 3,696 763 Business acquisition liabilities, current 4,888 12,188 Total current liabilities 65,807 82,691 Business acquisition liabilities, net of current portion 15,020 21,126 Deferred income taxes 9,013 13,260 Other liabilities 1,784 1,699 Total liabilities 91,624 118,776 Commitments and contingencies (Note 13) Equity: Additional paid-in capital 207,182 192,629 Accumulated other comprehensive loss (1,760) (1,958) Retained earnings 604,601 524,558 Total equity 810,119 715,324 Total liabilities and equity 901,743 834,100 Class A Common Equity: Common stock 72 71
  • 16. Income Statement Consolidated Statements of Income - USD ($) shares in Thousands, $ in Thousands 12 Months Ended Dec. 31, 2015 Dec. 31, 2014 Dec. 31, 2013 Income Statement [Abstract] Sales $ 544,753 $ 474,371 $ 434,459 Cost of goods sold 132,803 110,857 100,343 Gross profit 411,950 363,514 334,116 Operating expenses: Research and development 36,982 31,687 26,870 Selling, general and administrative 214,014 187,798 182,518 Provision for litigation (11,268) 5,667 23,055 Total operating expenses 239,728 225,152 232,443 Operating income 172,222 138,362 101,673 Interest income, net 1,304 805 467 Foreign currency transaction loss (1,159) (899) (804) Other income 438 374 665 Other income, net 583 280 328 Income before income taxes 172,805 138,642 102,001 Income tax provision 60,021 46,157 33,389 Net income $ 112,784 $ 92,485 $ 68,612 Earnings per share: Basic $ 1.19 $ 0.98 $ 0.74 Diluted $ 1.17 $ 0.97 $ 0.73 Weighted average shares outstanding: Basic 95,046 94,227 92,647
  • 18. Competitors Spinal inmplant revenue growth 2015 2014 GMED 14.84% 9.19% ZBH 95.17% 2.42% JNJ -5.52% 0.22% MDT -1.58% -2.30% SYK 0.00% -0.40% EPS Growth 2015 2014 GMED 21.43% 32.43% ZBH -81.69% -7.39% JNJ -4.14% 17.89% MDT -1.58% -2.30% SYK 2.40% -0.48% YTD Performance GMED -20.45% ZBH 3.44% JNJ 15.21% MDT 8.24% SYK 25.34% % of Revenue from Spinal Implants GMED 100% ZBH 6.74% JNJ 5.57% MDT 10.14% SYK 7.40%
  • 19. R&D R&D Spending as % 2015 2014 2013 GMED 6.79% 6.68% 6.18% ZBH 4.48% 4.00% 4.39% JNJ 12.91% 11.43% 11.47% MDT 7.70% 8.10% 8.70% SYK 6.20% 6.35% 5.90% Number of spinal products GMED 150 ZBH 50 JNJ 39 MDT 14 SYK 47
  • 20. Risks • Sale force • Larger competitors • Currency exchange • Disruptive segment • FDA • Product expectance • Obsolete inventory
  • 21. Why GMED • Superior margin vs their competitors and plan to increase • Robust pipeline • Recent entrance into high-growth market
  • 22. Q3 Performance • EPS: $0.29 • EPS: $0.29 • Revenue: $135.75m (-0.9%Y/Y) • $-3.95m • U.S. -4.1% • International Sale Increased: 34.1% • Completed acquisition of Alphatec’s • 1% worldwide decreased
  • 23. Full year Guidance: 2016 • Revenue: $560m • -2.8% • 2017 full year sales of $625m • -2.34% • EPS: $1.13 • -3.42% • Increased Spending: Robotics and trauma. • Launched 7 new products, total of 15 2016
  • 24. Analyst Overview • Strong Buy: 2 • Buy: 4 • Hold : 5 • Sell: 1 • Strong Sell: 0 • PriceTarget Range: $23- $30 • Average PriceTarget: $26.33
  • 25. Historical Financial Data HISTORICAL FINANCIAL DATA2011 2012 2013 2014 2015 LTM 5Yr. Avg. Revenue Growth Rate % 16.4% 12.6% 9.2% 14.8% NA 13.3% Operating Margin 29.4% 29.7% 23.5% 29.2% 31.6% 31.4% 28.7% EffectiveTax Rate 37.3% 35.6% 32.7% 33.3% 34.7% 34.0% 34.7% Depreciation & Amortization as % of Revenue 5.1% 4.7% 4.5% 4.6% 4.4% 5.0% 4.7% Capital Expenditures as % of Revenue 6.8% 6.4% 5.5% 5.2% 9.3% 7.4% 6.6% NWC as % of Revenue 34.6% 37.8% 40.0% 45.5% 48.4% 85.8% 41.3%
  • 26. Assumptions GLOBAL ASSUMPTIONS Shares Outstanding (Millions) 96 Risk Free Rate 2.07% Current Price per Share $21.30 Beta 0.62 52Week Low $ 21.15 Credit Rating 52Week High $28.60 Cost of Debt 1.28% Analyst Low $23.00 Terminal Shares Out (Millions) 96 Analyst High $30.00 Market Rate 9.00%
  • 27. WACC CalculationsCAPM Risk Free Rate 2.07% Market Rate 9.00% Beta 0.62 Cost of Equity (CAPM) 6.37% Cost of Debt Using Credit Rating 0 Cost of Debt used in WACC 1.28% Cost of Debt used in WACC 1.28% Tax Rate 34.03% Shares Outstanding 96 Price per Share 21.30 Market Capitalization 2,038 Cash + ShortTerm Investments 257 BookValue of LongTerm Debt - WACC 6.37%
  • 28. Base Case BASE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020F Revenue Growth Rate 3.0% 3.0% 3.3% 3.3% 3.3% Operating Margin 27.0% 27.0% 27.0% 29.0% 29.0% EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0% Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0% Depreciation & Ammortization as % of Revenue 4.5% 4.5% 4.5% 4.5% 8.0% NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0% Terminal Growth Rate 1.5%
  • 29. Upside UPSIDE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020F Revenue Growth Rate 3.5% 4.0% 4.0% 4.0% 4.0% Operating Margin 29.0% 29.0% 29.0% 31.0% 31.0% EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0% Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0% Depreciation & Ammortization as % of Revenue 4.5% 4.5% 4.5% 4.5% 8.0% NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0% Terminal Growth Rate 1.5%
  • 30. Downside DOWNSIDE CASE ASSUMPTIONS 2016F 2017F 2018F 2019F 2020F Revenue Growth Rate 2.0% 2.0% 2.0% 2.0% 2.0% Operating Margin 24.0% 24.0% 24.0% 26.0% 26.0% EffectiveTax Rate 35.0% 35.0% 35.0% 35.0% 35.0% Capital Expenditures as % of Revenue 8.0% 8.0% 8.0% 8.0% 8.0% Depreciation & Ammortization as % of Revenue 4.5% 4.5% 4.5% 4.5% 8.0% NWC as % of Revenue 40.0% 40.0% 35.0% 35.0% 35.0% Terminal Growth Rate 1.5%
  • 31. DCF Output Scenario Base Upside Downside Terminal Shares Outstanding 96 96 9 6 PV ofTotalCash Flow 2,073 2, 276 1,78 8 Value of Debt - - - Value of Cash 257 257 25 7 Value of Equity 2,330 2, 534 2,04 5 Value of Equity per Share $ 24.35 $ 2 6.48 $ 21.3 7 Potential Upside 14.32% 24.30% 0.35% Weight 50% 20% 30% Target Price $ 23.88 Upside/Downsid e 12.12%