NuVasive Likely Undervalued, But It's Hard To Find Catalysts

Valuation alone doesn't move stocks - expensive stocks don't fall just because they're expensive, and cheap stocks don't rise just because investors suddenly decide they're too cheap. In most cases, it requires some sort of driver or catalyst to get investors to reconsider a name, and that's a challenge for NuVasive (NASDAQ:NUVA) today.

The shares of this spine-focused medical device company do look undervalued today, but they've looked undervalued for a while. Although the shares have slightly outperformed the broader medical device space since my last update and outperformed names like Alphatec (ATEC) and SeaSpine (SPNE) while recently starting to lag Globus (GMED), they still haven't done anything to celebrate over the last five years.

NuVasive is salvageable, but the company's management needs to offer more than what is apparent today - investors need to have a reason to believe in growth drivers beyond the cervical portfolio and that long-awaited margin improvement will actually materialize. While this could happen, there's a real risk that "okay, but not great" growth and margins keep a lid on the share price performance at NuVasive.

 

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NuVasive Likely Undervalued, But It's Hard To Find Catalysts

NuVasive's Turnaround Story Needs A Boost From Better Results

 

The long, frustrating, wait for meaningful better performance from NuVasive (NASDAQ:NUVA) continues on, with the company losing share during the pandemic and only just recently showing a little momentum again in the business. Newer offerings like Pulse and Simplify continue to offer some longer-term upside, but there’s also still meaningful work to do to improve margins and leverage what should be a strong portfolio into share regrowth.

About the best thing I can say about NuVasive’s share price performance since my last update is that you could have done worse. NUVA shares are down about 5% from that last article, basically matching the wider performance of medical devices, and also outperforming other spine players like Globus (NYSE:GMED), Alphatec (NASDAQ:ATEC), and SeaSpine (NASDAQ:SPNE).

At this point, a bullish position on NuVasive is still a contrarian call that NuVasive can reignite share growth in the business through newer products like Pulse and Simplify and a refreshed sales effort for key platforms like X360, as well as drive the meaningful margin leverage that has proven elusive for far too long.

 

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NuVasive's Turnaround Story Needs A Boost From Better Results

NuVasive Still Getting No Love With COVID-19 And Competitive Worries

 

A good rule of thumb on the Street is that if a company is beating expectations and the shares are still weak, you ought to approach with some caution. That’s been the case with NuVasive (NUVA), as the company has logged two solid better-than-expected quarters since my last update, but the shares are still down about 6% since then, lagging the broader medical device space by more than 20%.

Renewed fears that COVID-19 infections will lead to another round of postponed elective procedures are valid, as are concerns that reintroduced restrictions on in-person sales calls will hamper the launch of the new Pulse platform. Likewise, I’m sympathetic to the general idea that the spinal market isn’t as attractive as it once was.

Even so, I think this overlooks the progress the company has made in upgrading its portfolio – not just Pulse, but Modulus (3D-printed implants for interbody fusion), and the cervical portfolio. I don’t think my assumptions are ambitious, with mid-single-digit revenue growth, double-digit FCF growth, and mid-20%’s EBITDA margins supporting a fair value in the high $60’s to mid-$70’s, but this is clearly a name where sentiment is not with the stock.

 

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NuVasive Still Getting No Love With COVID-19 And Competitive Worries

NuVasive Has More To Offer Than The Street Thinks

There are definitely some concerns that NuVasive (NUVA) management still has to address, but these shares have done alright since my last bullish write-up - rising more than 20% and more than doubling the performance of the broader med-tech space and outperforming Globus (GMED), though not keeping pace with the recent melt-ups of Alphatec (ATEC) or SeaSpine (SPNE).

With some meaningful recent product releases, a value-adding deal, and the upcoming Pulse launch, I believe the company can reverse some of its recent share losses and rebuild some positive sentiment. Undervalued on the basis of cash flow, revenue growth, and margins, I believe these shares should trade into the $70s.

 

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NuVasive Has More To Offer Than The Street Thinks

NuVasive At New Highs As New Management Has Quickly Built Credibility

Companies don’t turn on a dime, and it’s not fair to attribute all of NuVasive’s (NUVA) recent improvements to new management, but there has definitely been a shift at NuVasive – not just in tone and priorities, but in delivered performance as well. With NuVasive not only improving strongly upon its core (the X360 platform) but also expanding into new areas (Pulse Robotics), and showing improved operational execution, it’s no wonder investors have come back to this name. I liked NuVasive in June, and the shares are up about 35% since then, almost quintupling the performance of the larger medical device segment. Although 2019 has developed more or less as I expected from a modeling perspective, I’m more bullish on the company’s near-to-medium-term future. Although the stock already reflects this, this would certainly be a name to reconsider on a pullback.

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NuVasive At New Highs As New Management Has Quickly Built Credibility

NuVasive Is On A Better Path, But Remains A 'Show Me' Story

NuVasive (NUVA) has strung together four quarters of above-market growth, but investors remain skeptical as to just how quickly new management can get this business back on a better path. Progress on operating margin expansion has been frustratingly inconsistent, though management has made it clear that 2019 is a re-investment year, and it will take time for the company to recover from the mistakes of the former management team, including supporting/ignoring the wrong product development opportunities.

The shares look undervalued to me on both cash flow and revenue growth, and I believe the company is on its way toward fixing/resolving a lot of the issues that have caused problems over the last few years.

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NuVasive Is On A Better Path, But Remains A 'Show Me' Story

K2M Shores Up A Weak Spot For Stryker

One of the best med-tech names out there, Stryker (SYK) doesn’t have many weaknesses, but the company’s spine business has been one notable exception. With a portfolio that has been lacking in innovation or differentiation, Stryker has seen its market share in spine drift lower against the likes of NuVasive (NUVA) and Globus (GMED) in recent years. Acquiring K2M (KTWO) is a strong step in shoring up the weakness of Stryker’s spine business, and while some investors may question Stryker’s decision to “double down” in a tough business, the long-term benefits of the move could be larger than they first appear.

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K2M Shores Up A Weak Spot For Stryker

Disruptive Innovation And Generally Good Execution Driving Globus Medical

Although there was a little hiccup in June, Globus Medical (GMED) has continued to outperform in a hot med-tech market, as investors have been fired up by the company’s disruptive innovation (particularly in robotics) and prospects to leverage meaningful share gains and pull-through in the coming years. At the same time, the company’s “core” spine business has continued to gain share in what may finally be a recovering U.S. market for spine procedures.

Up close to 80% over the past year, valuation remains my biggest concern with the shares. Ongoing beat-and-raise quarters should be able to support the stock (if not drive it higher), but the stock does appear to be carrying multiples in excess of what the business can support, and I believe that ups the risk.

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Disruptive Innovation And Generally Good Execution Driving Globus Medical

NuVasive Boosted By Renewed Confidence, But Follow-Through Will Be Critical

The last couple of years have certainly highlighted that NuVasive (NUVA) has yet to outgrow its volatility, but the stronger than expected second quarter results were the sort of confidence-building results I thought these shares would need to get back some of their luster. Now the question is whether or not the company can leverage recent new product introductions to maintain that momentum and whether procedure volumes in the spine market at large can support a stronger growth outlook.

With the shares back into the high $60s, it’s tougher to make a call on NuVasive. While there are still opportunities to gain share in the spinal market, NuVasive doesn’t have the operating track record of a company like Stryker (SYK), and I certainly wouldn’t criticize investors who bought shares in the $40s thinking about cashing in and moving on. If NuVasive can deliver another quarter or two of better than expected growth, though, a fair value in the mid-$70s could very well come back into play.

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NuVasive Boosted By Renewed Confidence, But Follow-Through Will Be Critical

K2M Gets A Boost From A Stronger Spine Market

Investors have been doing some bargain-shopping lately in the spinal care space, as these stocks have largely lagged a strong med-tech market due to ongoing concerns about weak U.S. volume growth and persistent price pressure. That bargain-shopping got a nice boost with second quarter earnings, as all but one of the four major independents (K2M (KTWO), NuVasive (NUVA), Globus (GMED), and SeaSpine (NASDAQ:SPNE)) saw a 10% or better pop on June quarter earnings (Globus being the exception, but that stock had been on a tear up into June).

I’m still a little concerned about the overall level of valuation in the med-tech space and the risk that spine procedure volume growth could disappoint again, but I also still like K2M. Although the company’s focus on complex/deformity helps to shield it somewhat from volume and price pressures, I also like the company’s expanding sales force and product line-up, as well as the potential for margin leverage as it scales up its operations. Although the shares are no bargain by discounted cash flow, they do appear to be trading at a lower forward revenue multiple than the growth rate would otherwise suggest is fair.

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K2M Gets A Boost From A Stronger Spine Market

K2M Disrupting The Market, Growing, And Still Undervalued

Innovation can still produce results even in a sluggish U.S. spine market, as seen with the ongoing growth at companies like K2M (KTWO) and Globus (GMED). In the case of K2M, the story is still about the company's disruptive product development in degenerative and complex spine, supported by a strong platform in 3D-printed implants. With that, the shares have done okay since my last update - rising close to 10%, which is not as good as Globus, but pretty good next to other med-techs in the spine space like Stryker (SYK) and NuVasive (NUVA).

I continue to believe that K2M shares are undervalued. The company's liquidity and cash flow situation is not ideal, but spending money on product development and competitive rep hires to support those product launches makes sense, and I believe the company will get to double-digit FCF margins within five years. With that, I'd consider buying into the mid-$20s.

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K2M Disrupting The Market, Growing, And Still Undervalued

NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

Investors remain reluctant to give NuVasive (NUVA) much benefit of the doubt, and based upon the company's recent performance, I can't say I blame them. Although I wrote back in January that I thought it would take time for the company to rebuild investor confidence, I'm still surprised to see the nearly 10% drop in the share price over that period, while Globus Medical (GMED) has shot up nearly 20% and K2M (KTWO) has risen close to 10%.

There are a lot of issues with NuVasive right now, including a fairly spotty history of earnings quality, worries about competitors poaching away reps, and signs that NuVasive's new products aren't producing the same growth leverage as before. What's more, as NuVasive has grown to become a bigger player in the spine market, it's harder and harder for the company to separate itself from the challenges in the market.

Valuation is tricky. On a cash flow basis, the expected return isn't as high as I'd like to see given the risks. On the other hand, med-tech doesn't often trade on cash flow and the shares do look undervalued, perhaps significantly so, on an EV/revenue basis. There's some appeal here as a turnaround story, but NuVasive will be granted little quarter or patience by the Street if results don't start meaningfully improving.

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NuVasive Not Getting, Or Deserving, The Benefit Of The Doubt Yet

K2M Looking To Move Past A Disappointing 2017 With Innovation-Fueled Growth

The last year, and especially the last six months or so, hasn't been very friendly to the pure-plays in the spine space like K2M (KTWO) and NuVasive (NUVA), and though Globus (GMED) has had no such problems. In the case of K2M, this company's focus on complex and degenerative cases hasn't spared it from some of the same overall pressures that have hit the sector, and the shares were down about 15% from the time of my last article before a recent rally shrunk that underperformance a bit.

Although K2M's recent underperformance is a little concerning, the company still has a strong line-up that should drive better results in 2018 and beyond. Competition remains a risk, but K2M has brought innovation to a space that has generally been overlooked and that has helped serve as a "force multiplier" for the sales effort of this relatively small company. While I wouldn't buy (or recommend) a stock on the basis of M&A potential, K2M looks like an attractive digestible target, but the shares have enough standalone upside to justify a closer look.

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K2M Looking To Move Past A Disappointing 2017 With Innovation-Fueled Growth

Globus Medical Revving Up Into 2018

I’ve thought highly of Globus Medical (GMED), but I really didn’t expect the strength in the stock that the market has delivered since my last write-up. The shares have risen more than a third in a little more than six months and close to 80% in the past year, with the stock really taking flight after third quarter earnings. I believe at least some of this is due to Globus Medical offering pretty clean growth in a spine market where growth has become harder to find recently, not to mention the upside from the company’s entry into trauma.

It’s not all that comfortable to be on the negative side of a story with momentum, but I struggle to make the numbers work with Globus now. I do believe the company’s new robot platform, trauma products, and strong overall portfolio in spine can drive high single-digit revenue growth and double-digit FCF growth, but that’s already in the share price and I’m not comfortable paying more than 5.5x forward revenue. That being the case, I’ll be cheering from the sidelines for the time being.

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Globus Medical Revving Up Into 2018

A Sluggish Spine Market Keeping The Pressure On NuVasive

NuVasive (NUVA) is a case in point for a couple of things I've long believed about stocks. First, the process of revising earnings and expectations usually takes multiple quarters. Second, "buy on pullbacks" is actually hard advice to follow, as good companies don't often get all that cheap unless there are some legitimately scary (or at least nerve-wracking) issues going on with the company.

Although NuVasive shares eventually showed a little positive momentum after my last piece, the shares are down about 10% from that level now after another sell-off tied to the company's guidance at a major sell-side industry conference. With a less robust outlook for 2018, I've trimmed back my expectations some, but I still believe the shares are undervalued on the basis of long-term growth in the mid-single-digits. NuVasive has work to do to restore investor confidence, though, so I don't expect a sharp turnaround outside of an unexpected event like a buyout.

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A Sluggish Spine Market Keeping The Pressure On NuVasive

A Window Has Opened For NuVasive

Writing on NuVasive (NUVA) three months ago I said, “Given the history here of the market swinging too far during both the bad times and the good times, I'd be careful buying near the highs, but I'd certainly reconsider if the sector sells off on another bout of health insurance reform uncertainty and/or a company-specific shortfall in earnings/guidance.”

One of those big swings has occurred, with the shares down a quarter since then. The decline hasn't come without some reasons, including a slower U.S. spine market, executive departures, and a subpoena from the OIG, but these don't strike me as long-term issues. Instead, they remind me of a lot of the other short-term setbacks that have created interruptions in NuVasive's long-term run. To that end, I believe strong revenue growth and margin leverage are still in play here, and I believe the shares are actually undervalued.

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A Window Has Opened For NuVasive

With Stryker, One Of The Best Always Seems To Get Better

Med-tech giant Stryker (SYK) isn't going to lead the pack every quarter or every year, but it's hard to argue with the long-term performance of this company. Better still, the company has never been one to rest on its laurels, with management always looking for ways to improve its existing businesses and branch out into adjacent markets.

Stryker doesn't look especially cheap right now, but that's about as surprising as Wednesday following Tuesday given the company's almost four-year run of mid single-digit organic revenue growth, its solid free cash flow generation, and the prospects to improve margins and drive better results from areas like robotics, imaging, neurovascular, and spine. I'm not an enthusiastic buyer at this price, but Stryker's quality gives it a near-permanent spot on my watch list, as the shares do occasionally sell off and come back down into a buyable price range.

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With Stryker, One Of The Best Always Seems To Get Better

Globus Medical Has Wobbled A Bit, But Still On Good Footing

Since I last wrote on Globus Medical (GMED) in March of 2016, “second tier” spine names have enjoyed a good run. K2M (KTWO), which I've liked more than Globus, is up a strong 85% and NuVasive (NUVA) is up more than 60%, but Globus too has rewarded my belief that it was undervalued with a roughly 46% upward move in the shares. What's more, given that Globus didn't exactly cover itself in glory in 2016 with respect to its organic revenue growth performance, I believe at least some of this move is a sector-wide shift toward a more positive view on the spine market and share-takers within that market.

Looking ahead, I don't see Globus as particularly cheap, but that's an increasingly common issue. I think Globus is back on track with respect to performing in line with its guidance, but I do worry that management could be stretching itself a little thin between its core spine business, its foray into robotics, and its new trauma business. I do still see opportunities for Globus to grow and gain share and it's not a bad hold at these levels, but I'd be tempted to wait in the hope of a pullback before building a substantial new position.

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Globus Medical Has Wobbled A Bit, But Still On Good Footing

Innovation And Execution A Powerful Combination For NuVasive

NuVasive (NASDAQ:NUVA) is a case in point as to why I'm a little cautious sometimes stepping away from strong growth stories driven by innovation and strong operational execution, particularly in markets/sectors that don't always have as much of those as they should. While NuVasive had a great run going into my last write-up in October, and did offer investors a brief pull-back, the shares have since climbed another 20% or so on the back of respectable financial performance and strong "in the field" innovation.

Valuation remains problematic. NuVasive is a relatively rare combination of good growth, strong margin leverage, and expanding market share, and I'm not surprised that it has become a popular go-to name in the space. That said, the shares are now pricing in a high teens FCF growth rate that may be hard to surpass. Given the history here of the market swinging too far during both the bad times and the good times, I'd be careful buying near the highs, but I'd certainly reconsider if the sector sells off on another bout of health insurance reform uncertainty and/or a company-specific shortfall in earnings/guidance.

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Innovation And Execution A Powerful Combination For NuVasive

K2M On Track, Gaining Share, And Continuing To Disrupt

Spine care company K2M (NASDAQ:KTWO) isn't going to be the easiest stock to own, as I expect investors to overreact to quarterly revenue trends and guidance, and I fully expect some bumps in the road as the company continues to launch and grow a portfolio of disruptive technologies for the spine care market. I also expect ongoing growth, though, as the company out-innovates its larger rivals, takes share, and ultimately leverages that into solid profits.

The shares are up about 20% since my last update, sandwiching the company between the outperforming Globus (NYSE:GMED) and underperforming NuVasive (NASDAQ:NUVA) over that time. Trading in the low $20s, the shares still look a little undervalued on the basis of medium-term revenue growth and margin outlook and look relatively appealing up to around $25. Although that doesn't leave a tremendous amount of upside from today's level, I would not be surprised if K2M outperformed, and I would keep this name in mind if the company's early May earnings report sees an overdone negative reaction.

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K2M On Track, Gaining Share, And Continuing To Disrupt