My Own Analyst

MAKO Update

I need to look into this more, but I just found out that a competitor product from Blue Bell Technologies received FDA clearance for partial knee replacement.    

By the way, I am aware we lost FINL and XEC and am going to give it thought overnight.  While I like the stocks and think that the entries are attractive, December can be very tricky.  I might end up carrying fewer than the normal 4 short-term trades for the next few weeks.

MAKO Prices Offering

3mm shares at 13.15 - max sale of 3.5mm shares if underwriters exercise their overallotment option.  The stock is up on this news (13.50/13.60 as I type).  I think that it's good to get this behind them and encouraging that the sell-off yesterday was technical and not based on bad fundamental news.  I have to wonder how many people were stopped out or who panicked and sold.

I saw a note saying that the timing implied the company is confident in Q4 - not sure I agree, but it's true that you want to sell and then not disappoint.  I will add that with 13mm shares short and a part of the thesis that they might need to sell stock, a 3mm share offering that is now done could fuel short-covering.

I checked and my target has been based on 45mm shares, so I was expecting 3mm (not 5mm like I had said).  Thus, my target doesn't change - it's 26, based on 8.5X trailing sales of 137mm a year out.  I am interpolating off of the 2013 full-year consensus of 141mm and the 2012 consensus of 107mm to 11/15/13.  This is obviously a very expensive target, but, if the company can hit those numbers I expect investors will trade it there.  The P/S range over the past two years has been the current 5X to as high as 25X.

 

The RAVN trade expired - will be back with new trade, maybe in MAKO

MAKO: Now We Know

Well, I had hoped that they wouldn't, though my target is based on it happening, and it is:  Equity raise.  There are no details yet except that Jefferies is doing the deal.  This makes management look dumb yet again, as they had suggested last quarter that it wouldn't be necessary.  This quarter, they were more ambivalent on the call.  Our sale is now looking real good.  Our purchases - not.  The good news is that this will remove an overhang (of a possible equity offering).  Let's see how many shares - I had budgeted 5mm, but I think it could be less.

How To MAKO Some Money

MAKO reported a sales beat and roughly in line earnings.  As is typical, there are lots of moving parts.  Trying to hone in on the most important details, let me share some bullets first:

• After two quarters of systems misses, they hit
• But, they missed on procedures
• But, they are guiding very strongly for procedures
• But, they lack credibility
• But, they are almost halfway through the quarter and procedures are booked a month in advance.

So, you see some of the back and forth...

I come down bullish.  It's a lumpy and  young biz.  If you peel back the onion, they are making progress.  I think that Wall Street wants an empire to be built overnight, but it's not realistic.  Even with reduced procedure growth that is based on a big bounce in Q4, the year-over-year growth is quite strong.  At the end of the day, I have to judge three things:

1. Do patients want it
2. Do doctors want it
3. Is the price of the stock too high

Of course, there's more than that, but it's Yes, Yes and No in my view...

Huge short-interest here, guys.  Lot's of people betting that this company is a flash-in-the-pan.  I think that they focused on system sales and succeeded says a lot.  I think that the 6 procedures instead of 7 procedures per system in Q3 was disappointing, but it was the summer!  If the company doesn't bounce back for Q4, given its discussion of its confidence, I will have to change my view.  

Most people in this stock are big losers, but we are winners.  We may be fighting tax-loss selling, but I think we get this stock to 22 in the next one or two quarters.

MAKO: Cannacord Says Quarter In Line

While they remain neutral, the Cannacord call is bullish to me.  After missing two straight quarters, it's important to hit the expecations this quarter, which Cannacord's surveys suggest will happen.  They believe the company will hit the guidance on new boxes and that utilization per box will be similar to last quarter.

MAKO on the Go

MAKO gapped up the second day in a row.  Of course, with options expiration and a huge short-interest, we probably shouldn't be surprised.  The pop today, th0ugh, had a fundamental basis.  Actually, I believe yesterday's may have had a reason to.  Today, JPM was out talking about 13 new customers listed on the MAKO website, which raises the chance that the third time will be a charm (after two straight misses on new placements).  Yesterday, apparently GS upgraded to Neutral and raised the target price to 17 from 15.  I picked up the GS news from a strange source, so not sure it's exactly correct.  Not an endorsement from GS, but, with everyone short, it's not helping them!

I am tempted to sell or sell some as we approach 20-21, but it's a temptation I should perhaps resist...

LMNX: Significant Contract

Luminex announced it has been awarded a contract worth up to $11.6M over three and a half years. The contract will fund development of a prototype instrument that is highly portable, field-deployable diagnostic tool capable of rapid detection of biothreat agents and patient response biomarkers indicative of systemic disease. This hand-held system will detect both protein and nucleic acid targets to aid diagnosis of Systemic Inflammatory Response Syndrome, a consequence of blood infection in conventional combat, biowarfare and combat operations in developing and resource-limited areas. 

 

This is good news, as I don't think it was in the outlook.  It's over 3.5 years, so that's just $3mm per year.  My target it based on sales, so this adds about $15mm to the value of the company, which is about .35 (almost 2%).  I doubt the market reacts this quickly.  More importantly, though, this is appears to be "validation", which is worth a lot more.

 

Yes, MAKO Could Double - Here's Why:

http://www.beckersasc.com/orthopedic-spine-driven-ascs/first-50-robotic-knee-surgeries-at-san-francisco-surgery-center-qaa-with-orthopedic-surgeon-dr-kevin-stone-and-surgery-center-administrator-jeff-wong.html?A_With_Orthopedic_Surgeon_Dr__Kevin_Stone_and_Surgery_Center_Administrator_Jeff_Wong=

 

GREAT article...

MAKO: Insider Buying

2 Directors bought $125K of stock between them at 12.95...

Potential MAKO Acquirer?

I ended up adding MAKO to my Top 20 Model Portfolio yesterday, selling out GOOG.  MAKO is a bit risky given the recent execution, the fact that they aren't profitable and the possibility of needing to raise equity next year if they fail to meet aggressive growth projections, but it is also a potential home-run (i.e. if it gets back to where it was a few months ago, it's more than a triple).

The company is an attractive acquisition candidate.  Not only could a company like ISRG make what is called an adjacent technology acquisition, but there are many in the space that compete with either invasive surgeries or with inferior minimally invasive surgical procedures.  Balancing this, one of these companies could also develop rival technology.

This morning, I read this:  http://www.massdevice.com/news/ma-smith-nephew-looks-make-moves

You may need to set up a free subscription to see the whole article, but here is the part that interested me:

Smith & Nephew (FTSE:SN, NYSE:SNN) is on the hunt for buyout candidates, according to CEO Olivier Bohuon, ranging from a "bolt-on acquisition at $10 million to something much more significant."

Armed with $221 million in cash and equivalents as of June 30, the British medical device company has plenty of dry powder on hand to make its move. And Bohuon said Smith & Nephew "will borrow for the right acquisition" during a conference call yesterday.

Smith & Nephew has been actively seeking products to expand its current product offerings in minimally invasive surgery, he added.

Looking at the company's financials, they have a market cap of over $9 billion, equity of over $3 billion and tangible equity of $2 billion.  They indeed have $221mm in cash, but they also have about $81mm in debt.

They are into minimally invasive surgeries and they are in the hip and knee spaces, among others.  Less than half their business is in the U.S., with over $4 billion a year in sales.

I am not sure that they would do such a dilutive and aggressive deal, but they could borrow most of the $1.1 billion it would likely take to buy MAKO ($25).