Streamlining Operations By Focusing On Healthcare Will Improve Margins

Key Takeaways

• Strategic refocus on core healthcare markets and innovation in patient monitoring is expected to drive sustainable revenue growth and market expansion.
  
• Streamlining operations through resource allocation and cost optimization aims to improve net margins and increase future earnings potential.
  
• Uncertainty over the consumer business sale, tariffs, and accounting changes could impact Masimo's revenue predictability, profitability, and future growth execution.

Catalysts

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

• The potential sale of the consumer business and resulting focus on healthcare could streamline operations and improve net margins by allocating resources to higher-return areas, optimizing the cost structure, and reducing overhead.
  
• The strategic refocus on core healthcare markets and leveraging innovation in patient monitoring are expected to drive sustainable revenue growth as Masimo aims to address unmet market needs and expand market share.
  
• Initiatives to manufacture high-volume sensors in Malaysia and operational efficiencies improve the healthcare gross margin, with year-over-year gains highlighting potential for further improvement in production and sourcing costs.
  
• Strong momentum in contract wins and share gains through customer contracts provide good visibility into future revenue growth, as the incremental value of new contracts continues to be a leading indicator for revenue performance.
  
• The anticipated increase in operating margins and non-GAAP earnings per share growth, supported by strategic cost optimization and portfolio rationalization, reflect Masimo's ability to increase earnings and cash flow significantly in 2025 and beyond.

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 April 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 45.6x on those 2028 earnings, up from -29.0x today. This future PE is greater than the current PE for the US Medical Equipment industry at 31.6x.
• 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 7.1%, as per the Simply Wall St company report.

Masimo Future Earnings Per Share Growth

Risks

• The potential sale of Masimo’s consumer business introduces uncertainty, with the timing and terms not yet determined; this could impact revenue predictability and profitability.
  
• Tariffs on products imported from Mexico could significantly impact Masimo's healthcare cost of goods sold, potentially affecting net margins if costs can't be offset through price adjustments or operational changes.
  
• A recent net loss on a GAAP basis due to large noncash impairment charges and asset write-downs signals challenges in asset management and could weigh on future earnings if not mitigated.
  
• A new CEO with only weeks into the position could face execution risks in implementing strategic plans and maintaining or accelerating growth, which may affect projected earnings.
  
• A change in accounting practices, such as those related to lease accounting, has affected the recognition of revenue, potentially impacting short-term revenue visibility and cash flow projections as contract revenue recognition is deferred over time.

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 45.6x, assuming you use a discount rate of 7.1%.
• Given the current share price of $163.14, the analyst price target of $195.7 is 16.6% 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.