As Spinal Stocks Climb Toward Yearly Highs, There’s Still Room for Upside

spinal stocks - As Spinal Stocks Climb Toward Yearly Highs, There’s Still Room for Upside

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Cantor Fitzgerald is starting coverage on biotech companies in the spinal segment, a market that the investment house thinks has a $9-billion global market opportunity. Already, patients need medical devices for knees and hips, but the spine could be an even bigger orthopedic market.

Investors looking to benefit from this opportunity should hone in on these four spinal stocks.

GMED Stock

Globus Medical Inc (NYSE:GMED) earned an “Overweight” rating from Cantor Fitzgerald. According to Globus, the spinal implants market will grow by 6.6% CAGR through 2022 and is an $8-$10-billion opportunity.

In the first quarter, the company earned $0.41 a share (non-GAAP) as revenue grew 11.9% from last year to $174.41 million. While demand for its ExcelsiusGPS robotics and navigation system strengthened, its day-adjusted demand increased by 4% in the U.S.

Globus generated net cash from operating activities of $52.3 million, adding to the $473.6 million on its cash balance. GMED stock has a market cap of $5.41 billion and is valued at 10.6 times its book value per share.

Up over 100% from 52-week lows and trading at a P/E of 42.8, investors buying GMED stock could be late to the game. The average price target implies upside of below 5% on GMED stock (per TipRanks).

KTWO Stock

K2M Group Holdings Inc (NASDAQ:KTWO) is another medical appliances firm whose shares are backing off from yearly highs. This $1-billion company reported revenue growth of 9.7% year-over-year, to $67.87 million. The company lost $0.26 a share in the first quarter.

K2M announced two major product launches: the licensure of its BACS® Data Management tool to the International Spine Study Group Foundation (ISSGF), and the commercial launch of the YUKON™ OCT Spinal System.

K2M also said in its press release that it benefited from above-average demand in the U.S. and international markets.

OFIX Stock

Orthofix International NV (NASDAQ:OFIX) may capture more interest from value investors after the selloff last month. Markets are reacting to the 5.8% YOY revenue growth that resulted in $0.39 a share in earnings.

Cash flow fell by $14.4 million in the first quarter. The company ended the quarter with $77.1 million, down from $81.2 million in the previous quarter.

At a market cap of $1.03 billion and an even higher book value per share (compared to K2M or Globus) of 17 times, Orthofix is not a bargain stock due to the recent drop. But the correction is normal as markets recognize that growth will only top around 9% in EPS in the next five years.

SPNE Stock

SeaSpine Holdings Corp (NASDAQ:SPNE) is the smallest of the spinal companies Cantor Fitzgerald covers, with a market cap of $173.5 million. Again, the “Overweight” rating is not prescient, given the stock is up over 40% from its low but off 10% from the year’s high.

SeaSpine reported first quarter losses of $0.50 a share on revenue of $33.18 million. The 4% YOY sales growth could justify the positive breakout in the stock.

If the company successfully builds its distribution, revenue from Orthobiologics, which totaled $18 million, and Spinal Implants, which totaled $15.2 million in Q1, will go up. Gross margin was 63.3%, up from 58.7%, and helped by lower material and manufacturing costs.

Takeaway on Spinal Stocks

The fresh coverage for spinal stocks is late, but the case for more gains for investors will play out if revenue growth continues. 2018 has been a strong year for these companies, and so far, there aren’t any headwinds to change that story.

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Source: Ycharts

Of the four spinal stocks discussed, SeaSpine is of particular interest. Wall Street’s average price target is $17, which offers more than 30% in upside.

A fair value model on suggests an even higher price target of $19 a share. The Earnings Power Value model assumes revenue growth in the range of 10.5-22% and positive adjusted earnings for this fiscal year.

Disclosure: Author does not own shares in any of the companies discussed.

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