One of Wall Street's biggest winners of the day is Masimo, a biotechnology company whose shares have climbed 11.3% to a price of $122.77 -- 20.79% below its average analyst target price of $155.0.
The average analyst rating for the stock is buy. MASI may have outstripped the S&P 500 index by 12.0% so far today, but it has lagged behind the index by 8.8% over the last year, returning 7.6%.
Masimo Corporation develops, manufactures, and markets various patient monitoring technologies, and automation and connectivity solutions worldwide. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Masimo's trailing 12 month P/E ratio is 83.5, based on its trailing EPS of $1.47. The company has a forward P/E ratio of 29.1 according to its forward EPS of $4.22 -- which is an estimate of what its earnings will look like in the next quarter.
As of the second quarter of 2024, the average Price to Earnings (P/E) ratio for US health care companies is 27.61, and the S&P 500 has an average of 28.21. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
MASI’s price to earnings ratio can be divided by its projected five-year growth rate, to give us the price to earnings, or PEG ratio. This allows us to put its earnings valuation in the context of its growth expectations which is useful because companies with low P/E ratios often have low growth, which means they actually do not present an attractive value.
When we perform the calculation for Masimo, we obtain a PEG ratio of 2.73, which indicates that the company is overvalued compared to its growth prospects. The weakness with PEG ratios is that they rely on expected growth estimates, which of course may not turn out as expected.
To gauge the health of Masimo's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
MASI's average gross profit margins over the last four years are 63.3%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -5.1%.
Masimo's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to the company's operating cash flows minus its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cash Flow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 94,100 | 44,000 | 50,100 | -79.05 |
| 2022 | 264,600 | 25,500 | 239,100 | 72.51 |
| 2021 | 211,100 | 72,500 | 138,600 | -9.57 |
| 2019 | 221,642 | 68,375 | 153,267 | -31.09 |
| 2018 | 239,527 | 17,126 | 222,401 | 1696.74 |
| 2017 | 56,062 | 43,684 | 12,378 |
- Average free cash flow: $135.97 Million
- Average free cash flown growth rate: -13.2 %
- Coefficient of variability (lower numbers indicating more stability): 0.0 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, MASI is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Masimo's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 4, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 3.69 as of the second quarter of 2024.
Masimo is by most measures overvalued because it has a higher P/E ratio than its sector average, a higher than Average P/B Ratio, and positive cash flows with a downwards trend. The stock has poor growth indicators because it has a an inflated PEG ratio and weak operating margins with a negative growth trend. We hope you enjoyed this overview of MASI's fundamentals.
