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Orthofix Shares Waylaid by Margin Squeeze, Disappointing Outlook for 2019

- By Barry Cohen

FDA approval of a key addition to the Orthofix (NASDAQ: OFIX) line of cervical spine products wasn't enough to offset investor concerns about a gross margin squeeze when the company reported fourth quarter and full year results at the end of February.

Shares of the Lewisville, Tex.-global medical device company were hit hard. They have plummeted 18% to just more than $55.50 since the announcement. If there's any consolation for owners who have been in the stock for a year or more, the shares are still trading nearly $8 above its 52-week high.


Perhaps the beat down may have been worse if the company hadn't earlier announced approval of the M6-C artificial cervical disc for patients suffering from cervical disc degeneration. The addition gives Orthofix the widest selection of products for the condition in its key business segment, said President and CEO Brad Mason.

"The M6-C disc will be a flagship product for Orthofix for many years to come," said Mason during the earnings conference call with analysts. Some key surgeons will start using the product this month, with a controlled U.S. launch starting late in the second quarter, he added.

For the full year, Orthofix EPS was $1.79, up 10% from 2017. That was 2.3% higher than Zachs had it pegged for, according to an article on Yahoo Finance. What dinged the stock were two things: drops in gross and operating margins and 2019 guidance that fell short of estimates.

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Zachs chopped the stock way down from a strong buy to a hold while BTG maintained its neutral rating. Prior to results being released, Cantor Fitzgerald had a $66 price target on Orthofix and had the stock as a buy.

Management predicted the Special Kinetics line is just the stimulus needed to accelerate growth in 2020 and beyond. Orthofix bought privately held Spinal Kinetics last year. M6-C was the crown jewel among the artificial cervical and lumbar discs products acquired in the deal.

Additional acquisitions may be in the offing. Responding to a question from Jeffrey Cohen of Ladenburg Thalmann about future M&A activities, Mason said the company will consider assets that fit with its mainstay businesses and are in faster growing industry segments.

Orthofix may be a target itself. The company has a market cap of just more than $1 billion, easily digestible by several giants that compete in the biggest part of its business, bone growth therapy. They include Stryker (NYSE: SYK), Medtronic (NYSE: MDT), the DePuy Synthes division of Johnson & Johnson (JNJ) and Zimmer Biomet (NYSE: ZBH).

In addition to Orthofix's declining margins and disappointing guidance, investors may be skittish about company leadership given that Mason is going to retire after six years at the helm. He'll stay on until a successor is found, although it's not clear whether that person will come from inside or outside the company. An outside hire may indicate the Orthofix board thinks none of the company's top executives is ready to take over the top spot.

Investors with patience may see Orthofix as a good buy at its current price, although it still comes with a high PE of 77.

Disclosure: The author has a position in JNJ.

This article first appeared on GuruFocus.