GMED Stock Study (8-9-23)

I recently did a stock study on Globus Medical Inc. (GMED) with a closing price of $56.83.

M* writes:

     > Globus Medical Inc is a medical device company that develops
     > and provides healthcare products and solutions to hospitals,
     > physicians, and surgical centers. The firm’s products are
     > organized into two categories: musculoskeletal solutions, which
     > include medical devices and instruments used mostly for spinal
     > and orthopedic procedures, and enabling technologies, which
     > include advanced computer systems developed for enhancing
     > surgical capabilities. The vast majority of the company’s revenue
     > is generated from musculoskeletal solutions products, and more
     > than half of the revenue is earned in the United States.

Over the past decade, this medium-size company grows sales and earnings at annualized rates of 9.9% and 7.4%, respectively. Lines are mostly up, straight, and parallel except for EPS declines in ’16, ’19, and ’20. PTPM leads peer and industry averages until ’19 while ranging from 16.0% in ’20 to 31.7% in ’15 with a last-5-year mean of 21.9%.

Also over the past decade, ROE mostly leads peer and industry averages until ’18 despite falling from 15.2% in ’13 to 10.5% in ’22 with a last-5-year mean of 10.2%. The company has zero long-term debt and Debt-to-Capital remains at 0.0%.

Quick Ratio is an impressive 5.5 and Value Line rates the company B++ for Financial Strength.

With regard to sales growth:

• CNN Business projects 10.0% YOY and 9.5% per year for ’23 and ’22-’24, respectively (based on 11 analysts).
• YF projects YOY 10.0% and 8.7% for ’23 and ’24, respectively (14 analysts).
• Zacks projects YOY 10.3% and 8.3% for ’23 and ’24, respectively (6).
• Value Line projects 9.1% annualized growth from ’22-’27.
• CFRA projects 10.3% YOY and 9.5% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year ACE of 9.5%.

I am forecasting below the range at 8.0% per year.

With regard to EPS growth:

• CNN Business projects 12.6% YOY and 12.3% per year for ’23 and ’22-’24, respectively (based on 11 analysts), along with 5-year annualized growth of 12.0%.
• MarketWatch projects 13.2% and 12.4% per year for ’22-’24 and ’22-’25, respectively (15 analysts).
• Nasdaq.com projects 10.4% YOY and 22.4%/year for ’23-’25 and ’23-’26 [6, 5, and 1 analyst(s) for ’23, ’25, and ’26].
• Seeking Alpha projects 4-year annualized growth of 12.0%.
• YF projects YOY 12.1% and 12.6% for ’23 and ’24, respectively (14), along with 5-year annualized growth of 12.6%.
• Zacks projects YOY 12.1% and 11.7% for ’23 and ’24, respectively (8), along with 5-year annualized growth of 11.5%.
• Value Line projects annualized growth of 12.6% from ’22-’27.
• CFRA projects 12.1% YOY and 12.6% per year for ’23 and ’22-’24, respectively, along with a 3-year CAGR of 12.0%.
• M* projects long-term growth of 11.3% per year.

I am forecasting below the long-term estimate range [mean of six: 12.0%] at 10.0% per year. I will use ’22 EPS of $1.85/share as the initial value rather than 2023 Q2 EPS of $2.01 (annualized).

My Forecast High P/E is 26.0. Over the past decade, high P/E has ranged from 24.8 in ’15 to 66.0 in ’20 with a last-5-year mean of 49.2. The last-5-year-mean average P/E is 40.0. I am forecasting toward the lower end of the range [only ’15 and ’16 (25.6) are lower].

My Forecast Low P/E is 22.0. Over the past decade, low P/E has trended up from 14.5 in ’13 to 28.4 in ’22 with a last-5-year mean of 30.9. The last-10-year median is 23.7. I am forecasting at the lowest value since 2016.

My Low Stock Price Forecast (LSPF) of $40.70 is default based on $1.85/share initial value. This is 28.4% less than the previous closing price and 20.0% less than the 52-week low.

These inputs land GMED in the HOLD zone with a U/D ratio of 1.2. Total Annualized Return (TAR) is 6.1%.

PAR (using Forecast Average—not High—P/E) is 4.2%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on only 33 studies done in the past 90 days (my study along with 7 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 8.8%, 10.4%, 33.6, and 24.0. I am lower across the board. Value Line’s future average annual P/E of 28.0 is lower than MS (28.8) and higher than mine (24.0).

MS high / low EPS are $3.12 / $1.68 vs. my $2.98 / $1.85 (per share). My EPS range is slightly higher despite a slightly lower EPS growth rate.

MS LSPF of $41.90 implies a Forecast Low P/E of 24.9 vs. the above-stated 24.0. MS LSPF is 3.9% greater than the default $1.68/share * 24.0 = $40.32, which results in [slightly] more aggressive zoning. MS LSPF remains 3.0% greater than mine.

My TAR (over 15.0% preferred) is much less than MS 13.7%.

MOS backing the current study seems robust, but due to the small MS sample size I consider it moderate.

I track a few different valuation metrics. PEG is 2.2 and 2.6 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.72. Kim Butcher’s “quick and dirty DCF” prices the stock at 20.0 * [$4.20 – ($0.00 + $0.85)] = $67.00 thereby suggesting the stock to be undervalued by 15.0%.

The stock is a BUY under $49/share, but I would look to acquire a bit lower. This is due to the moderate (not robust) MOS and a pending merger with NuVasive that seems to have Value Line and CFRA concerned. I will re-evaluate the stock under $47 to see if TAR qualifies.