Upgraded Sensors And Refined Healthcare Focus Will Improve Patient Monitoring

Key Takeaways

• Product upgrades and sales strategy shifts are expected to increase revenue and improve net margins through enhanced monitoring offerings and regional focus.
  
• Refocusing on core healthcare and proactive tariff management could boost earnings and preserve margins amidst increased costs.
  
• Cybersecurity risks, tariff impacts, and sales force disruptions could affect Masimo's margins, revenue consistency, and financial flexibility.

Catalysts

Develops, manufactures, and markets various patient monitoring technologies, and automation and connectivity solutions worldwide.

• Masimo's planned upgrade of existing sensors and next-generation monitors, including AI-based advanced algorithms, is expected to drive increased revenue growth by enabling continuous patient monitoring.
  
• The strengthening of Masimo's product offerings in advanced monitoring categories like capnography, hemodynamics, and brain monitoring leverages its leadership in pulse oximetry, which could enhance both revenue and net margins.
  
• By shifting the sales force from a product-centered approach to a regional focus, Masimo plans to boost sales effectiveness and commercial excellence, potentially increasing revenue growth and improving net margins.
  
• The divestiture of the consumer audio business (Sound United) allows Masimo to refocus on its core healthcare business, potentially enhancing earnings by investing in higher-margin opportunities.
  
• The strategic focus on mitigating the impact of tariffs through supply chain adjustments and potential pricing strategies suggests a proactive approach to preserving net margins in the face of increased costs.

Masimo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Masimo's revenue will decrease by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from -14.6% today to 16.7% in 3 years time.
• Analysts expect earnings to reach $295.1 million (and earnings per share of $5.25) by about May 2028, up from $-304.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $356 million in earnings, and the most bearish expecting $220.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 45.7x on those 2028 earnings, up from -28.6x today. This future PE is greater than the current PE for the US Medical Equipment industry at 30.3x.
• Analysts expect the number of shares outstanding to grow by 1.63% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Masimo Future Earnings Per Share Growth

Risks

• The ongoing investigation into a recent incident affecting Masimo's website and systems could pose cybersecurity risks, impacting operational efficiency and potentially increasing costs, which may affect net margins.
  
• The impact of new tariffs, especially if they remain unmitigated, could increase the cost of sales significantly, leading to a reduction in operating margins and negatively impacting earnings.
  
• Changes in their sales force model from dedicated to more generalist roles might lead to initial disruptions and transitional risks, potentially affecting revenue growth if not managed effectively.
  
• Timing issues related to tender contracts have caused fluctuations in capital and consumable sales, which, if persistent, could lead to unpredictable revenue streams and affect overall growth projections.
  
• The decision to prioritize share buybacks from the proceeds of the Sound United sale instead of reducing debt may limit financial flexibility and potentially impact future earnings growth if unexpected needs arise.

Valuation

• The analysts have a consensus price target of $195.698 for Masimo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $215.0, and the most bearish reporting a price target of just $170.58.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.8 billion, earnings will come to $295.1 million, and it would be trading on a PE ratio of 45.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $161.47, the analyst price target of $195.7 is 17.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.