Saturday, April 30, 2005

a new position! Symmetry Medical (SMA)

I picked up some shares of SMA at $16.95 on Friday. SMA is by far the largest OEM to orthopedic device industry. 2005E revs = $230MM. SMA sells trays & cases (23% of 2004 sales), implants (37%) and instruments (33%). The remainder is in an "other" category. SMA sells to all the big ortho players including DePuy, SYK, SNN, SYK, ZMH, WMGI.

Here are some of the reasons why I'm long and see downside maybe to $14 and upside to the mid-20's over the next two years:

  • The valuation is right. I'm willing to pay 17x next year's earnings of roughly $1 for this name. The sell-off of SMA over the past months has to do of course with general market conditions but also due in large part to concerns about the large ortho players. Elliot Spitzer is looking into co's like SYK, ZMH, DePuy over relationships they have with doctors/consultants and a numer of analysts have talked about an end to these co's very strong pricing power. First off, the Spitzer investigation doesn't impact SMA. Secondly, my premise going long here is based on volume gains (8-9%) in orthopedic procedures that we will see going forward. Cumulatively, I think SMA can match that number (8%) and pick up another 300bp of growth per year from price, mix and acquisitions. But I'm mainly focused on the volume. All in all, I see SMA being capable of 11% growth in the medium term (revs) with EPS growing a bit faster than that.
  • The hip/knee replacement story is not going away. Gen X'ers are getting older and replacing hips and knees earlier than ever.
  • SMA is another co. that I own that is not especially sensitive to economic change (which I believe will come to the downside).

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