Cantel Medical Keeps Growing
CMN

September 28, 2011

Cantel Medical has been a good stock to hold so far in 2011, closing today at $21.28, up 30% from $16.38 a year ago, with a 52 week high of $28.29 and a 52 week low of $15.57. Not a bad showing in this tough market. Cantel is not a household word, so I thought I'd fill in my readers on what they do and why they might want to own a piece of this company.

Cantel Medical is a smallish company (market capitalization today ended at $366 million). Cantel specializes in infection control through sterilization and disposables. I know that infection control is more cost effective than treatment, and is becoming a much larger problem because of the evolution of multiple-antibiotic resistant bacteria. I watched Cantel for a while, then bought stock a couple of times when I thought the valuation was good.

Cantel is not a well-known name, even in hospitals, partly because it operates through named divisions. Minntech makes and markets endoscope and dialysis equipment sterilizers. Crosstex is the disposables business, working mostly in the dental market, but also moving into the general medical market. It makes face masks, sterilization patches, and other single-use items. Mar Cor makes machines to purify water, often for specialized medical needs. A smaller division is Saf-T-Pak, which produces specialty packaging for transporting specimens, and related materials.

When there are infectious disease scares Cantel gets bursts of extra revenue, so in evaluating the stock you might want to both zero-out such bursts to get a real trend line, and also figure that over time those bursts do add up.

Also, while Cantel does develop products and grows by increasing sales organically, they also grow by acquisition. If you, like me, have been burned occasionally by the poor acquisition strategies of other companies, you might not take this as a recommendation. However, for the few years I have followed Cantel they have done very well with acquisitions. They don't pay too much and they usually acquire a division of a company they want, rather than the whole company. Then they cross-sell the new products with their established sales force. They have made it work.

The latest acquisition was of Byrne Medical, announced August 2, 2011. Byrne manufactures products that act as replacements in gastrointestinal endoscopy procedures, eliminating the need for sterilization before reuse. The price of $100 million for a company with trailing annual revenues of $38.6 million seems high on a revenue basis, but trailing annual pre-tax profits were $8.6 million. Cantel expects to increase gross margins in the business, which has a historical growth rate of over 20%. The business is expected to be accretive over fiscal year 2012 ending July 31, 2012.

Since Cantel is already in the endoscopy business, cross-selling is a given. The combined endoscopy businesses will have 80 sales and marketing personnel. Acquiring Byrne is the largest transaction in Cantel's history. Even before the combination Cantel's recent endoscope sterilizer equipment sales had been ramping rapidly. The newer sterilization machines are called reprocessors; they do helpful things like inventory management that the aging machines can't do.

Meanwhile, the water purification business just keeps growing. Also the disposables business should ramp up when (of if) the unemployment rate tweaks down. People have been avoiding doctor and dental visits for economic reasons; when they have the dough to head back in for a checkup, the run rate will pick up again.

So, in summary, the overall anti-infection story is a good one. Cantel is a pure infection play, and it has top-notch management. Should you be cautious because the stock is up 33% y/y? My guess is that even in the short term the stock could make another run for its 52 week highs, if the overall market firms up. The trailing P/E ratio at the end of today was 18 (per NASDAQ), which is still reasonable for a company with a strong growth track record. Today's ending price seems fair to me and attractive for long-term investors looking for diversification in the healthcare space.

For more details on quarter results, see my Cantel Medical Q3 fiscal 2011 analyst call summary.

Disclosure: I am long Cantel, but have no plans to buy or sell in the next 2 weeks.

William P. Meyers

Cantel Medical Keeps Growing CMN

Cantel Medical Keeps Growing
CMN