Cantel Medical Grows Acquisition Margins
CMN

November 5, 2012

Cantel Medical (CMN) specializes in disinfection equipment for dental offices and medical centers. Its products range from face masks to complex endoscope sterilization machines. Today it closed at $26.31, up $0.40. Cantel's 52 week high was $28.97 on September 25th. Is Cantel's run up over? Should it be bought or held for its long-run potential?

Cantel has grown both organically and through acquisitions. Acquisitions are often not a plus for investors. In Cantel's case, however, the acquisitions have gone very well. The acquired companies were bought as reasonable prices. Cantel has been able to increase margins at the acquired companies, partly by using its existing sales forces to ramp sales. The process has left Cantel with some debt, but it is at low interest rates and there is a clear path to paying it off.

In fiscal Q4 ending July 31st Cantel Medical revenue was $98.7 million, up 2% sequentially from $97.2 million and up 15% from $86.0 million year-earlier. Net income was $9.6 million, up 17% sequentially from $8.2 million and up 104% from $4.7 million year-earlier. EPS (earnings per share) were $0.35, up 17% sequentially from $0.30 and up 94% from $0.18 year-earlier.

Last Friday a new acquisition was announced. It resembles earlier acquisitions: small enough to digest easily, complementing an existing business, and with a very fair price to earnings ratio. SPSmedical Supply Corporation does sterility assurance and monitoring, so it fits well with Cantel's Crosstex division. Cantel paid $32 million. EBITDA for the last year was $4.3 million, so it cost less than 8 time EBITDA. There will be some acquisition costs in the December quarter, including $3.5 million capital expense to buy the facility SPSmedical works out of. But in the March 2013 quarter it should add roughly $1 million to profits.

Cantel ended fiscal Q4 with $30 million in cash and $60 million in debt. After this transaction net debt should be around $65.5 million. Since cash flow from operations was $17.7 million in the quarter and should continue to rise in 2013, net debt should be approaching zero in 2014 unless more acquisitions are made or there is significant capital expense during 2013.

I have been watching Cantel Medical since early 2010. I was originally attracted to the infection control story, which I knew had become a serious problem in hospitals. Infection control spending has ramped considerably these last few years, but much remains to be done. Cantel has competitors in each of its areas of expertise, but it also tends to be a leader. It is a remarkably well run business with a frugal management that seems to be committed to working to build long-term value for shareholders.

Cantel is not exactly a cheap stock, with a P/E of 23.1 at today's price. The P/E has been justified by the quality of management and earnings, but there is no guarantee it will remain at the current level. Cantel pays a small dividend, with a yield well under 1%, which is fine for me as I am looking for long-term returns and feel cash should be used to pay off debt and to expand further.

Note that Cantel was affected by the recession, and its revenues are not immune to macroeconomic factors. It also has had some spikes in revenue during infectious disease scares, so it can be a bit lumpy from quarter to quarter and, to a lesser extent, year to year.

Cantel is suitable to conservative long-term investors at today's price.

Disclaimer: I own Cantel Medical. I will not make trades in CMN for one week following publication of this article.

See also my Q4 2012 Cantel Medical notes

Keep diversified!

William P. Meyers

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