Symmetry Medical Completes Public Offering
BY JOHN MCCORMICK, DECEMBER 13, 2004
The markets are open for business for orthopedic IPOs! Two weeks ago biodegradable implant manufacturer Inion raised '30 million on the London Stock Exchange at valuation of 19x revenue. Orthotics manufacturer Langer also announced a secondary offering to raise $30 million for debt repayment. Finally last week, Symmetry Medical, Inc. (NYSE:SMA) completed its long awaited IPO by raising $120 million on the New York Stock Exchange. This Warsaw, IN based Company is the world's largest independent supplier of implants, instruments and trays to orthopedic medical device manufacturers. After paying the bankers their due, Symmetry plans on using the proceeds to repay its existing subordinated debt. The Company will also use proceeds to repurchase a portion of its outstanding preferred stock and preferred stock warrants.
Valuation
Back in May, Symmetry filed a registration statement with the SEC to issue 10 million shares at a price range of $14 to $16 a share. Due to the summer' jitters with oil and a queue of companies looking to go public, the offering was scaled back to 8 million shares and priced at $13 to $15. When the Company finally went public last week, not only was it priced at $15 - the high end of the range - the price immediately shot up to $18 which effectively awards the Company a $600 million market capitalization.
To value Symmetry in the context of other orthopedic medical device companies, we have to come up with some kind of 2004 revenue estimate. A crude way of doing that is to apply the 2004 9-month year-over-year revenue growth to the 2003 'pro forma' revenues. Pro forma simply means 'as if' Symmetry's acquisition of Mettis (a UK company) was completed in such a way that allows us to compare revenue numbers on an apples to apples basis.
Symmetry Pro-Forma Revenue Numbers
Source: Company Prospectus
Applying the impressive 26.5% 9-month growth rate to the 2003 revenue number of $158 million renders a crude 2004 revenue estimate of just over $200 million. This is not particularly meaningful estimate due to many factors including the Company's high revenue concentration, timing of orders and potential seasonality. On the other hand, we are comfortable with ballparking 2004 revenues at $200 million since there is a substantial currency effect in the 9-month growth number. Mettis, Symmetry's 2003 acquisition, is a British company. If one wants to get a sense of how Symmetry's revenue growth performs in a 'normalized' currency environment, the original S-1 filed with the SEC is a helpful guide: 3-month year-over-year pro-forma revenue growth ended March 29/2004 was only 14.0%. That is not to say that we have isolated the currency effect here, but we do know it is significant and the Company has been perfectly clear about that issue. An interesting corollary to this discussion is if the dollar does not continue to decline, we can expect a revenue growth rate of significantly less than 26.5% during 2005.
On that basis, the market is awarding an approximate 3.0x market capitalization/revenue valuation to the Company. Symmetry is, in fact, not an OEM like Zimmer or Stryker, but a lower gross margin, more capital intensive supplier to the industry that has limited intellectual property and high customer concentration.
What lies behind Symmetry's current valuation of 3.0x estimated 2004 revenues? Is it low for an orthopedic device company? Perhaps 'yes' if you consider the case of industry bellwether Zimmer which currently trades at 7.0x revenues. Perhaps 'no' if you compare the multiple to Tutogen which supplies allograft to the industry. The table below compares Symmetry's market capitalization/revenue multiple to Tutogen and Zimmer.
Selected Market Cap / Revenue Multiples in Orthopedics
Source: HealthpointCapital, LLC Research
Investors seeking to analyze Symmetry should remember that the Company is a supplier to the industry and therefore should not command a 7.0x market capitalization/revenue multiple. The Company is not selling proprietary implants to doctors, but is supplying implants, tools and trays to the kingpins of the industry. As we noted in our June 7, 2004 article on Symmetry, the Company has comparatively low gross margins, low R&D expenditures, high capital expenditures, high customer concentration, fewer patents and is controlled by a single stockholder. No one should be alarmed by those factors since that is simply the nature of being a supplier. In fact, Symmetry is profitable, is growing nicely (with or without currency effects) and also happens to be one of the largest (if not the largest) supplier to the high growth orthopedic device industry. The Company therefore has a derivative participation in the highest growth medical device industry in the world. We also note that the Company has a significant intangible benefit versus other suppliers: the Company's location is in the cradle of the industry Warsaw, Indiana right next door to some of its biggest customers. While that may be hard for portfolio managers to appreciate, anyone in the orthopedics business knows Warsaw is the place to be.
Is 3.0x revenues too high for Symmetry? isn't Tutogen a supplier to the industry as well? isn't Tutogen growing rapidly? Yes and yes, but Tutogen is an allograft supplier and does not supply simpler devices, tools and trays. As an industry, allograft is arguably less attractive than Symmetry's area given the slow growth commodity-like nature of allograft and allograft's nebulous regulatory status. What about dj Orthopedics? dj Orthopedics is not a supplier, it sells direct to docs and has no customer concentration issues. Is Symmetry price too high on that basis? We can't argue affirmatively since dj Orthopedics has a lesser growth rate than Symmetry. Bracing is a notoriously slow growth business and dj Orthopedics has been revamping its bone growth stimulation business. The two companies trade on the New York Stock Exchange and they're both in orthopedics, but that's about as far as it goes.
To us, Symmetry deserves to be valued clearly below the first-line implant manufacturers such as Zimmer, Stryker, Wright Medical and Biomet, but there may be arguments that support the Company being valued more liberally when compared to slower-growth commodity plays such as allograft and bracing. Obviously, any exercise to value Symmetry deserves a lot more homework and a developed understanding of how currency can effect the Company's revenue and earnings growth.
