We upgrade our recommendation on Masimo Corporation (MASI) to Outperform following its better-than-expected fourth-quarter fiscal 2010 results. Both earnings and revenues for the quarter beat the Zacks Consensus Estimate. Profit for the quarter soared nearly 15% year over year, buoyed by a double-digit growth in sales.
Revenue (up 14%) growth was fueled by higher shipment of the company’s Signal Extraction Technology (“SET”) pulse oximetry and Rainbow SET pulse co-oximetry monitors, driven by new contract wins.
Masimo is a market leader in the pulse oximetry monitoring equipment industry. It has successfully defended its intellectual property and continues forging new relationships with OEMs. The company remains committed to its research and development activities, resulting in continued new product launches and technology advancements.
Masimo’s patented signal extraction technology provides the ability to measure various components of blood through motion and low perfusion pulse oximetry. This addresses the primary limitations of conventional pulse oximetry. The company launched its Rainbow SET Pulse CO-Oximetry technology in 2005, which allows non-invasive and continuous monitoring of additional blood constituents that earlier required invasive procedures.
Moreover, in 2009, the company introduced Rainbow SET Accoustic Monitoring for continuous non-invasive monitoring of acoustic respiration rate. Higher demand for Masimo SET and Rainbow SET monitors continues to spur revenue growth.
Masimo recently extended its agreement (signed in Jan 2006) with Covidien (COV). Under the amended terms, Covidien will pay Masimo a royalty of 7.75% on its sale of the latter’s pulse oximetry products in the U.S. for three more years, starting Mar 15, 2011.
We are optimistic about the prospects of Masimo due to the steady growth in shipments, sizeable market opportunity and expanded pulse oximetry utilization into non-critical care areas in hospitals. Moreover, recurring revenues from sale of consumables are increasing at a brisk pace and shaping up as a long-term growth driver.
Also, the renewal of the royalty agreement with Covidien provides additional impetus. That said, we are also cognizant about intense competition and the company’s dependence upon its OEM partners. Our recommendation is supported by a short-term Zacks #2 Rank (Buy).
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MASIMO CORP (MASI): Free Stock Analysis Report
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