Spine Navigation Adoption And Limb Reconstruction Portfolio Will Drive Strong Long Term Outperformance

Catalysts

About Orthofix Medical

Orthofix Medical develops and markets innovative spine, orthopedics and bone growth therapies solutions that improve surgical outcomes and patient care globally.

What are the underlying business or industry changes driving this perspective?

• Acceleration in 7D FLASH navigation system placements, combined with Voyager earn out customers exceeding implant purchase commitments by more than 50 percent on average, positions Orthofix to capture disproportionate procedure volume growth and drive sustained double digit revenue expansion in U.S. Spine Fixation.
• The VIRATA Spinal Fixation system, engineered to integrate tightly with 7D and launching fully in the second half of next year into a roughly $2 billion U.S. pedicle screw market growing 4 to 5 percent annually, is expected to support a high margin growth engine that lifts overall company revenue and EBITDA margins through 2027.
• Orthofix unique, comprehensive limb reconstruction portfolio, including TrueLok Elevate and FITBONE internal solutions, is gaining traction in a roughly $2.6 billion market as surgeons seek specialized, outcomes focused offerings, supporting durable mid teens U.S. Orthopedics growth and expanding gross margins as mix shifts to premium products.
• Distributor consolidation toward larger, more capital efficient partners and targeted expansion into underpenetrated U.S. and international spine geographies is already producing mid twenties growth among the top 30 distributors, setting the stage for continued above market net sales growth and improving operating leverage.
• Consistent adjusted EBITDA margin expansion over seven consecutive quarters, combined with disciplined capital allocation and ongoing productivity initiatives following the discontinuation of lower margin M6 products, indicates a structurally more profitable model that can translate future top line growth into faster earnings and free cash flow growth.

Assumptions

This narrative explores a more optimistic perspective on Orthofix Medical compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming Orthofix Medical's revenue will grow by 6.1% annually over the next 3 years.
• The bullish analysts are not forecasting that Orthofix Medical will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Orthofix Medical's profit margin will increase from -14.6% to the average US Medical Equipment industry of 12.9% in 3 years.
• If Orthofix Medical's profit margin were to converge on the industry average, you could expect earnings to reach $126.1 million (and earnings per share of $3.05) by about December 2028, up from $-119.1 million today.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 11.4x on those 2028 earnings, up from -5.1x today. This future PE is lower than the current PE for the US Medical Equipment industry at 30.4x.
• The bullish analysts expect the number of shares outstanding to grow by 1.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Secular pricing pressure in spine and biologics, already visible in the disclosed price decrease at a major U.S. account, could intensify as larger competitors bundle offerings and hospitals focus on cost containment. This would erode average selling prices and constrain revenue growth and gross margins over time.
• Distributor transitions and consolidation into fewer, larger partners increase dependency on a small group of distributors. Any underperformance, strategic misalignment or renegotiation by these top 30 partners could slow procedure volume growth and materially impact net sales and EBITDA margins.
• The long-term growth narrative assumes successful full-scale launches and adoption of 7D FLASH, VIRATA and TrueLok Elevate. Slower than expected surgeon uptake, competing navigation technologies or unfavorable clinical data could limit Orthofix ability to capture share in spine and limb reconstruction, pressuring revenue and future earnings expansion.
• International expansion in spine and orthopedics, which is currently contributing to growth, also brings sustained exposure to unfavorable geographic and currency mix, reimbursement variability and distributor stocking volatility. These factors can dilute gross margins and introduce earnings volatility.
• The strategy depends on ongoing productivity improvements, free cash flow generation and disciplined capital deployment to fund innovation. However, higher inventory forward placement, rising stock based compensation and potential increases in R&D and commercial spend to defend share could compress free cash flow and slow adjusted EBITDA margin expansion.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Orthofix Medical is $27.2, which represents up to two standard deviations above the consensus price target of $22.8. This valuation is based on what can be assumed as the expectations of Orthofix Medical's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $27.2, and the most bearish reporting a price target of just $18.0.
  
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2028, revenues will be $976.8 million, earnings will come to $126.1 million, and it would be trading on a PE ratio of 11.4x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of $15.49, the analyst price target of $27.2 is 43.1% 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.