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CryoLife Inc. Message Board

  • dlhild Dec 13, 2012 1:19 PM Flag

    Why You Should Buy Cryolife by David Gould (DG):

    DG: For greater upside, you should consider buying smaller cap stocks. Cryolife trades at a respective 21.1x and 19.1x past and forward earnings, and has a very clean balance sheet with no debt. It can be easily bought out by a larger peer, and it has several good reasons to be bought out.

    Response: IMO I find it difficult to see why CRY would be an attractive buy-out candidate. Could someone make the case for this using specific reasoning versus jumping without explanation to a world view conclusion? BioGlue is presently very profitable and hence very valuable. However, it is off patent too, making its value more problematic. At one point I thought Tenaxis Medical may be able to compete in this space. But so far anyway Tenaxis Medical has not been able to obtain FDA approval, so I don’t know where things stand with them. Tissue does not appear to be profitable. The other cost centers are not yet sufficiently developed to assure material long-term profitability. PerClot may turn out to be a gold mine, or a dry hole, impossible to know this outcome. It will probably be three years or so before the patent issues are determined. Considering all of the uncertainty currently surrounding CRY, I just don’t see the logic of a buy-out, not at this time anyway. Again, if someone could make the buy-out argument case, I would like to read your reasoning.

    DG: Shares have, after all, risen ~50% YTD for a reason.

    Response: Yes, of course. A part of the jump came from settling litigation matters. The rest seems to have more or less resulted from market correlation. CRY stock price is down a lot if you go back to 2001, 2008, and other measurement points so I’m not sure this statement means much of anything, as you can measure from both favorable and unfavorable reference points.

    DG: In addition to developing medical devices for vascular and cardiac applications, Cryolife is positioned in the high-growth market for human tissue transplantation.

    Response: Here’s where DG really makes me wonder if he knows what he’s talking about. Tissue does not appear to have a high enough gross profit margin to be profitable. Anyway, nobody has shown me that the tissue cost center does in fact generate net operating income. Accordingly, IMO tissue sales could grow to infinity but the tissue cost center would probably still not generate any/much net operating income.

    DG: It’s BioFoam® Surgical Matrix protein hydrogel technology seals organs and is a potential game changer. This foam acts as a mechanical barrier that reduces blood flow, which leads to cellular aggregation. Right now, the technology is only approved for only investigational use through an IDE. This will enable the company to enter clinical trials in the US to gauge efficacy and safety in sealing liver parenchymal tissue.

    Response: Again, here’s where DG makes me wonder once again if he has a clue. "Game Changer”, someone please explain why. What I understand to be the case is that CRY may sell BioFoam for some indications in the Euro-zone. I would guess BioFoam sales are less than $1.5 million, hardly a “Game Changer”. But I thought SA said in the recent quarterly call that CRY had discontinued their FDA approval efforts (in part because the military was no longer funding it). Also, I thought that DAL said that CRY was discontinuing the BioFoam FDA approval process because of the complexities required in order to satisfy the FDA. So my understanding is that BioFoam will not be sold into the U.S. market. The non U.S.BioFoam market seems small. Accordingly, I don’t see this ever being a “Game Change”. Good CRY PR though.

    DG: At the same time, the existing business has come out better-than-expected. Third quarter EPS of $0.08 beat consensus by 50%. Certainly, management’s issuance of a first-ever quarterly dividend at a yield of 1.9% has helped showcase confidence over the fundamentals. This is a strong company with a promising a product available at a low price.

    Response: Analysts, who like to stay on good terms with management, generally set the bar low so that may account for some of the consensus overshoot. Also right now operating expenses are jumping around because of products being brought in house, clinicals, etc. Hence I’m not sure that volatile EPS numbers at this time are meaningful. As for the first-ever dividend, it is true that generally this is a strong indicator that management is confident they can continue to pay the dividend indefinitely. However, I’m not so sure buying shares may not have been the better approach, but who knows.

    Conclusion: The article seemed confusing, disjointed, and arguably even inaccurate. It felt to me like CRY’s PR firm may have at hand, perhaps a BIG HAND, in the story. IMO DG did not seem to have a very good understanding of CRY. IMO CRY is roughly at fair value at this time. The real CRY story, if one exists, is at least two or three years in the future. If CRY can make the recent acquisitions work, and if they can grow the BioGlue market, their long term price may appreciate nicely (Value Line and buckeye seem to think so). But that too depends on how CRY executes at the company level and what the market force gods have in store for us. All of this is just my reasoning, nothing more. You are responsible for doing your own due diligence.

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    • The Motley Fool article isn't "arguably" inaccurate, it is inaccurate. I'm in awe of Value Line compared to Motley Fool. For me, Biofoam was the disappointment of the year as far as Cryolife is concerned. To use the term game changer when talking about it is simply egregious even by the low standards of the Motley Fool.

      Sentiment: Hold

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