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Cantel Medical: Infection Control & Sterilization

02/19/2019 5:00 am EST

Focus: HEALTHCARE

Hilary Kramer

Editor, GameChanger Stocks

Infection control in hospitals is a serious issue. According to the Leapfrog Group, an organization whose stated purpose is to advance healthcare transparency for consumers, one in every 25 U.S. hospital patients contacts an infection daily to cause 90,000 deaths per year, explains Hilary Kramer, growth stock expert and editor of GameChangers.

Infections also cost billions of dollars, adding expenses to an industry under pressure to control them. Controlling infections is where Cantel Medical Corp. (CMD) comes in. Cantel is dedicated to selling such products and related services to hospitals and other healthcare providers.

The company is the largest pure play infection control company, with leading market positions in each of its operating segments. This includes Medical segments, consisting primarily of equipment used to clean and process devices used in endoscopy procedures. This is the largest segment, accounting for 54% of the company’s revenues.

The Life Sciences segment consists of water purification systems and filters used in applications such as dialysis, accounting for 28% of revenues. The final segment is Dental, consisting primarily of sanitary disposable products, accounting for 18% of revenues.

Increased patient visits should drive low to high single-digit growth across the company’s product lines. Cantel intends to supplement this growth through new products, market expansion and strategic acquisitions. In fact, the company has completed 35 acquisitions since 2000.

Cantel’s growth strategy has served the company well over the years, with sales growing 16% per year from 2003 through 2018 and operating income increasing 20% per year over the same period.

The shares are well off their all-time high of over $130 a share set in May 2018. Importantly, the growth story at Cantel remains intact.

In the first quarter of the July 2019 fiscal year, sales were up 6%, with organic sales up 4.3%, despite the fact the Life Sciences and Dental groups experienced sales declines due to inventory adjustments by customers.

Both segments are expected to return to growth later in the year. Meanwhile, the medical segment more than made up for the slack, with revenues up 13.5% and organic sales up 12.8%, reflecting strength across all product lines.

Earnings per share rose to $0.62 from $0.57, with gains limited by the company’s decision to pay its workers a living wage; investments in REVOX, the company’s next generation of sterilization solutions; and costs related to the implementation of a new Enterprise Resource Planning (ERP) system.

These cost pressures will persist through the remaining nine months of the fiscal year, and limit EPS gains for the year to about 4% to $2.70, despite an overall sales rise of 8%.

However, the cost pressures will fade in the July 2020 fiscal year, allowing the company to earn $3 a share on another year of 8% revenue growth, aided by the recently completed $32 million acquisition of Omnia S.p.A., a maker of dental consumables based in Italy.

Once the market has visibility to this $3 in EPS, I expect my $92 a share price target to be achieved. Cantel Medical is a buy below $82.

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