Cantel Medical Plans Expansion

October 14, 2010

by William P. Meyers

Cantel Medical is one of the few companies with a focus exclusively on infection control. Last year it had a banner fiscal Q4, ending July 31, 2009, because the H1N1 flu scare created a run on its line of disposable face masks. Despite that, Cantel management reported revenue and earnings growth for its latest Q4 ending July 31, 2010 at its analyst conference call yesterday.

Revenue was $69.8 million, up 5% sequentially from $66.6 million in Q3, and up 4.5% from $66.8 million year-earlier. Net income was $4.6 million, up 7% sequentially from $4.3 million in Q3, and up 7% from $4.3 million year-earlier. EPS (earnings per share) were $0.27, up 8% sequentially from $0.25 in Q3, and up 4% from $0.26 year-earlier.

Gains in its endoscopy sterilization business and in water purification led to the record revenue. Disposables and services were off y/y because of the mask issue. The dialysis segment was also down, but this was due to purposefully dropping certain low margin items, resulting in a better profit margin.

In good news for American workers, the recently announced acquisition of the American water sterilization business of Gambro means that jobs will be moved to the U.S. from Sweden and be integrated with Cantel's manufacturing operations in the United States. The year prior to the acquisition this business generated revenues of $14 million. It will be added to Cantel's Mar Cor Purification subsidiary.

Disinfection and sterilization are major trends in the U.S. healthcare market. The increasing number of seniors, the problem of disease transmitted in hospitals, and the globalization of infections are all pushing volume and the need for quality improvement in these markets.

Cantel has increased its mask manufacturing capacity to be better able to cope with the next airborne infection epidemic.

Following the Gambro deal, Cantel has about $23 million in cash but $33 million in debt. Cash generation in Q4 was $11.6 million. Cantel has arranged for credit for further acquisitions. As long as they don't overpay for the acquisitions, with interest rates low this is a good expansion strategy.

Internal development is also robust. R&D expense in the quarter was $1.4 million, but the plan is to increase R&D. Revenues from new products could begin in 2011 and ramp in 2012. Compared to biotechnology companies, where R&D spend is much heavier and the risk of failure is high, this is a great model.

I see Cantel Medical as a company with excellent management and, at today's prices anyway, a good value for buyers. If you can buy now with a long term (minimum 1 year) investment view, you have a fairly safe outlook with likely healthy gains in revenues and profits. Of course there are the usual risks: failure of the FDA to approve an innovation and competition from other companies.

My own strategy is to accumulate Cantel over time, depending on its value relative to other opportunities. I have watched Cantel Medical (CMN) since 2008 and first bought stock in December of 2009. I have listened to a couple of prior analyst conference calls, and posted a summary for the Cantel Medical Q4 2010 call.

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Copyright 2010 William P. Meyers