The Integra Eye for the Low-Cost Buy
BY ROBIN R. YOUNG CFA, MARCH 1, 2004
Integra Life Sciences (IART), which reported a 58% jump in revenues to $185 million for the year ended December 31st, 2003, was downgraded by W.R. Hambrecht this past week. We have known IART CEO Stu Essig for quite a while and have watched with great admiration the manner in which he has transformed his tiny, struggling skin repair company into the large, cash rich neurosciences leader it is today. So, with what appeared to be a nice jump in sales and the new downgrade, we thought we'd revisit Integra and for the heck of it, re-read five years worth of 10-K's.
Five years ago, IART's revenues were $17.5 million. Since then, Stu and his team have acquired quite a few companies (it was hard to ferret them all out, but we think we caught about a dozen). Luckily, he has disclosed how much of his revenues have come from acquisitions and, generally, how much he has paid for these acquisitions.
Here's what we found. Over the course of these past five years, Stu's Fab Team has acquired about a dozen companies at an estimated cost of about $110 million, paying an average of 1.5x revenues. (We pulled Neurocare's 0.8 PSR out because it skewed the average down.) Of the $168.1 million in revenue growth generated in the past 5 years (that is this year's $185.6 minus 1998's $17.5 million), at least 55% has come from acquisitions, the rest from internal or organic growth. We say “at least” because it is hard to tell from the numbers how much acquired revenues have grown in the years after their purchase and so we made a conservative estimate.
IART's stock is currently trading at 5.6x revenues. So, in effect, by buying sales at 1.5x when the market is willing to value them at 5-6x, Integra has added approximately $410 million, we estimate, to shareholder value. That's about 50% of the company's current value. Not bad.
But what strikes us most interesting is the type of company that attracts Integra's eye. Call it the Integra Eye for the Dull Buy. The company's most significant acquisition was, arguably, Neurocare which was purchased in 1999 for $25 million. This company was selling over $30 million worth of neural pressure monitors, shunts and neural endoscopes and really set Integra up to become a Neurosciences company. The following year, a division of NMT which sold ultrasonic aspirators, Ruggles surgical instruments and cryosurgery products caught Stu's eye. That was followed by a manufacturer of drainage bags and catheters; then a specialty manufacturer of titanium and metal implants; later another monitoring company; then another manufacturer of surgical instruments. Unrelentingly dull, consistent, cash flow positive companies.
By cobbling these companies together, Integra has grown its sales from $17.5 million to over $185 million. It's operating profit has risen from annual losses of $14.2 million in 1998 to the just reported $39.6 million for 2003. As a percent of sales, operating margins have risen from a minus 81% to a positive 21%.
Maybe Integra was due for a downgrade. It has to happen to every public company eventually. We don't know. But it would be hard to fault the manner in which Stu and his team have spent the shareholder's money these past five years. In many respects, like a good portfolio manager, Stu has made his shareholder's money on the buy-side – meaning he has bought well. In addition, as evidenced by IART's rising operating profit margins, it is no exaggeration to say that he and his team have managed this five-year old portfolio extremely effectively.
