Cantel Medical Takes Its Foot off the Gas

After a relatively strong first half of its fiscal year, Cantel Medical (NYSE:CMD) slowed downa little in its third fiscal quarter. And things don’t look like they’re going to pick up anytime soon with the medical device maker lowering revenue guidance for the fiscal year, causing shares to drop 16% yesterday.

Cantel Medical results: The raw numbers

Metric

Q3 2018

Q3 2017

Year-Over-Year Change

Revenue

$217.3 million

$192.1 million

13.1%

Income from operations

$27.1 million

$27.4 million

(1.4%)

Earnings per share

$0.45

$0.42

7.1%

Data source: Cantel Medical.

What happened with Cantel Medical this quarter?
Most of the growth came organically, although acquisitions added 4 percentage points to growth, and changes in currency added another 1.5 points. Endoscopy continues to lead the way with 18% year-over-year growth. Sales of recurring revenue for items used by the instruments, which tend to have higher margins, were up 16.1%. Sales in the water segment increased 9.2%. After losing a major medicalwater customer, Cantel is diversifying the segment, pushing into medical devices with its Revox low-temperature sterilizationsystem. Healthcare disposables continues to be the laggard with sales up 6.5% year over year, although the organic growth of 5.3% was twice the industry average, so it’s taking market share from competitors. Income from operations dropped as operating expenses increased, but that seems to be mostly due to acquisitions and one-time expenses for a legal settlement and business optimization. On a non-GAAP basis, operating profit increased 10.1%.
Gloved hands operate an endoscope

Image source: Getty Images.

What management had to say

After comparing the 2011-12 boom to the last two years, chief financial officer Peter Clifford explained why the company now expects slower growth in capital spending by its customers:

You can really see there’s been more than a pull-ahead effect, where the 2 years following those bubbles, the business has been pretty flat on capital. I think honestly that’s probably what we didn’t see when we started the year that we’re seeing as we get to the back half of this year on the endoscopy business is that U.S. capital is going to be a little bit tougher environment than what we anticipated.

Nevertheless, Cantel is still looking for acquisitions where it can find strategic fits, as outlined by Seth M. Yellin, Cantel’s executive vice president of strategy and corporate development:

I think from the acquisition perspective, we’re pretty happy with where we’re at in the pipeline overall and the opportunities we see in front of us, both in our existing businesses and in near adjacencies that we think could be good long-term growth drivers for the company with new technologies and new markets that could be really interesting drivers for us in the medium to longer term as well.

Looking forward

Instead of 13% to 14% year-over-year sales growth this fiscal year, management thinkssales growth will come in at 12.5% to 13%, which doesn’t sound too bad — except that the year-to-date growth sits at 13.9% through the first three quarters, so management is predicting quite a slowdown of growth in the fiscal fourth quarter. And investors should assume Cantel will see slower growth in fiscal 2019, as Clifford highlighted.

Fortunately on the bottom line, adjusted earnings per share will actually be going up, although that’s entirely due to the new tax law. Excluding that benefit, the non-GAAP earnings outlook remains unchanged, which investors can take as a win considering slowing revenue.