IRadimed: Caution On The Valuation Of This Excellent Company (NASDAQ:IRMD)

IRadimed (NASDAQ:IRMD) works in healthcare equipment for MRI services. It looks like quite a compelling investment in almost all areas other than its valuation. It has a very stable balance sheet and strong growth prospects, particularly when compared to peers. However, there is some uncertainty over whether it can keep its strong earnings growth up long term. My analyst rating for the stock is a Hold.

Operations

IRadimed is headquartered in Winter Springs, Florida. It was founded in 2004 and manufactures, develops, markets, and distributes Magnetic Resonance Imaging, or MRI, products.

Its MRI-compatible Intravenous (IV) Infusion Pump System (MRidium) is designed with non-ferrous parts and a non-magnetic ultrasonic motor. It enables the safe delivery of IV fluids, including anesthesia, during MRI procedures.

Also, its MRI-compatible Patient Vital Signs Monitoring System aids in a patient’s MRI care cycle through portable multi-parameter vital signs monitoring.

Additional accessories and services offered by IRadimed include non-magnetic IV poles, wireless remote displays with controls, dose error reduction systems, and peripheral capillary oxygen saturation (SpO2) monitoring with sensors.

IRadimed was responsible for the world’s first MRI patient monitor, the first use of wireless MRI technology, the first non-magnetic IV infusion system, and the first MRI monitor that was portable. These successes show strong capabilities for innovation within the company.

Forbes has named IRadimed as one of America’s Most Successful Small-Cap Companies for 2024. This outlines the organization’s prominence in MRI-compatible medical devices. Additionally, CEO Roger Susi spoke at the 42nd Annual J.P. Morgan Healthcare Conference recently, presenting the firm’s innovations and strategies.

Financials

The company’s revenues have been growing at an average YoY rate of 18.35% over the last five years. Its most recent YoY revenue growth of 25.17% is a 297.65% difference from the sector median of 6.33%.

Its diluted EPS has been growing at an average YoY rate of 154.97% over the last five years. Its most recent YoY diluted EPS growth of 25.35% looks very strong when compared to the industry median of -3.81%.

During 2016-2018, when IRadimed’s earnings saw significant volatility, it also was working on the development and marketing of new products, including its 3880 MRI-compatible patient vital signs monitoring system. The product was a significant innovation and would have likely contributed to higher volatility in earnings than revenues, although impacting both due to a change in focus away from selling current products to developing new ones.

In 2020, the effects of the pandemic had a significant impact on IRadimed’s income statement. Lockdowns, supply chain disruptions, and reduced operational capacities would have contributed severely to delays and reductions in orders. This is particularly true as many healthcare institutions were focused on the pandemic, curtailing non-essential costs.

IRadimed’s net margin is also the only profitable of its core industry peers aggregated by Seeking Alpha, representing it in a strong position regarding its profitability related to companies similar to its market cap:

The firm has a very strong balance sheet, consistently reporting much higher total common equity than total liabilities. As of the last report, only 15% of its assets are balanced by total liabilities. This is an extremely strong position for the organization to be in, and it is regular for it.

The company has also not issued any debt for over 10 years, and while it has been issuing common stock on a small but regular basis, it also buys back its common stock annually, too.

Also, its change in net working capital at the moment is larger than usual, a good sign. However, its free cash flow per share is relatively low compared to historically, moderately offsetting this. Its levered and unlevered free cash flow of -$0.7 million is acceptable considering its higher change in net working capital at this time.

Cash expenses contributing to this include a high level of capital expenditure of $7.2 million, which could mean that the company is investing in future products at this time, and I expect the weaknesses in the cash flow statement to be temporary as such, with long-term benefits to come for the company’s overall financial performance.

Valuation

IRadimed has a TTM P/E GAAP ratio of around 34, a 0.6% difference from the sector median of around 33.5. IRMD has a five-year average P/E GAAP ratio of around 72, so the stock is currently cheap compared to historical levels. Its forward P/E GAAP ratio is around 32, which is a significant 10.7% difference from the sector median of around 29.

While the firm’s P/E ratio does present some concern to the investment, the diluted EPS of the company has been growing at a rate of 26.89% on average over the last five years. It seems possible if one took an optimistic future EPS growth projection of 20% on average over the next 10 years that, the stock at present is just above fair value.

To calculate this, I used a discounted cash flow analysis and kept a 4% terminal stage growth rate, roughly in line with inflation, for a 10-year period following the growth stage and an 11% discount rate. My result was a fair value of around $41.25, a 5.4% overvaluation, considering the current stock price is around $43.50.

Risks

There’s a considerable risk that my 20% projected growth rate for the next 10 years won’t come to fruition. If it doesn’t, the shares could be considered significantly overvalued, and I would feel hesitant to own the shares. This is the prime reason why my analyst rating for the stock is a Hold at this time; the valuation is uncertain even amidst a very strong operational and financial picture otherwise for the firm.

In addition, the company only has a 0.35% dividend yield for the last trailing twelve months. Before this, the firm did not pay a regular dividend, and its current payment is 77.69% below the industry median dividend yield of 1.55%. Such a low dividend presents some risk to investors who are looking for stability from IRMD shares but also is a deterrent to income investors. Additionally, the low yield has a negative impact on the firm’s valuation, and its potential deterrent to new shareholders should be considered as a moderate risk.

Conclusion

I think investing in IRadimed stock at this time could be a good investment; however, the uncertainty surrounding its valuation, with, at the very best, no margin of safety, makes me cautious about buying the shares. Given that it is such an exceptional company, I will be carefully watching the price of the stock to see if I can buy it at a more favorable valuation at a later time. My analyst rating for IRadimed stock is a Hold.