InMode: Beauty In The Eyes Of The Beholder
InMode has seen a tough first and second quarter for obvious reasons, yet remained incredibly profitable.
Net cash balances never put the viability of the company in doubt as valuations were far too low in the spring.
Shares have seen a big recovery, although more than fully backed up by the third-quarter fundamentals and solid guidance.
I like the valuation a lot here, yet continue to have some reservations about the longevity of the business strength which withholds me from increasing my position.
InMode (INMD) has rapidly become one of my darlings since it went public in August 2019. Shares went public at levels in the mid-teens as a big momentum induced rally put a level of $55 on the board just three months later.
What followed was a brief pullback towards essentially the IPO level amidst the COVID-19 outbreak. Shares have regained a lot of lost ground, currently exchanging hands at $41 again.
A Quick Recap
InMode is a minimally invasive technology that develops human aesthetics therapies, all based on "energy" methods which focus on face, body contouring and medical aesthetics. Compared to actual invasive methods, benefits include less pain and fewer scars.
With an operating asset valuation of just $325 million at the offer price when the company went public, the valuations looked very modest with 2018 sales having doubled to $100 million and adjusted operating profits totaling $31 million that year. While this resulted in very modest valuation multiples, the second-quarter run rate for 2019 suggested revenues of $150 million a year and adjusted operating profits of $60 million, for earnings close to $1.50 per share. This resulted in a less than 10 times earnings multiple, not even accounting for a solid net cash position and noting that growth was quite impressive.
For that reason I initiated a big position, although truth be told I have been betting a bit on a momentum induced rally, as I head some real fears about the competitive strength and its solutions, hard to guess for an outsider like me. This was driven by the combination of the growth and low valuation, as the proposition almost looked too good to be true.
As it turned out, the company reported solid improvements in the third and fourth quarter of 2019. Revenues totaled $47 million in the final quarter of that year and operating profits were at $18 million. Even if I conservatively use the diluted share count instead of the reported basic share count, I pegged earnings power close to $1.50 per share and net cash was close to nearly $5 per share. Needless to say, multiples expanded a bit with shares still trading near the $50 mark early in 2020.
What Now? - 2020
The company guided for 2020 sales of $190-$198 million and $76-$80 million in adjusted operating earnings, basically the annualized numbers reported for the fourth quarter of 2019. This suggested that growth has stopped in a big way, and given the sustainability of the business model, or at least my questions on that, I would not be willing to pick shares at a market or premium to the market multiple.
First-quarter results revealed that revenues rose 32% on an annual basis to $40 million. This is down quite a bit from the fourth quarter, as activity almost came to a standstill in March for obvious reasons. As the company anticipated normal activity levels in March, operating profits fell to $6.0 million, for earnings of $0.15 per share on a diluted basis, while net cash rose to $200 million. Encouraging was that the company anticipated a demand recovery in the quarters to come. With shares trading around $30 at the time, I pegged the valuation as largely fair, although I remained upbeat on the long-term prospects for the shares, holding just a tiny position in the shares at the time.
Early August, the company reported second-quarter results with shares still trading in the low thirties at the time. Second-quarter revenues fell 21% on an annual basis to $30.8 million. Strong cost control resulted in operating earnings improving to $8.1 million on a sequential basis despite the revenue declines, with diluted earnings at $0.21 per share. Truth be told, quite decent results given that the products essentially could not be used for about two months' time, with procedures only recovering in a big way in June.
The board probably made a savvy move by allowing the buyback of a million shares in early September when shares were still trading at $33, as the company might just have had insight into great operational improvements during the third quarter. By mid-October, shares rose towards the $40 mark, as the company guided for preliminary third-quarter sales of just over $59 million, with diluted earnings seen at $0.61 per share (midpoint). Furthermore, the company feels comfortable that it will meet its original 2020 sales guidance.
Mid-November, the definitive third-quarter results brought some real comfort. Revenues came in at $59.7 million with net earnings reported at $23.9 million, resulting in $0.57 per share in diluted earnings. Net cash has risen to $234 million, or $4.50 per share if we conservatively use the diluted share count.
The company maintained the 2020 guidance for sales of $192-$195 million. This is very comforting as it essentially implies quarterly sales of $61-$64 million, suggesting more growth on a sequential basis. This suggests that even if we focus on the diluted share count, earnings trend at around $2.25 per share, on top of the net cash position. Trading at $41 currently, operating assets trade around $35, for about a 15-16 times annualised earnings multiple.
Concluding Remark
Based on the analysis above, it shows that the unleveraged business trades around 15 times annualised earnings which looks quite attractive at this point here.
Furthermore, these record revenue numbers in this kind of environment is very strong, as I would have expected much less demand in such an environment. With COVID-19 hospitalizations up in a big way, and people already feeling an economic impact, one might have expected less pent-up demand.
All of this gives comfort as shares continue to look very cheap if this would be a "normal" stock or company for which we safely could assume this is a sustainable business in the long run, which is something to which I have some doubt. No doubt that earnings power of $2.25 per share would translate into a $50 per share valuation if that is the case, not even counting net cash, as it seems fair to say that more investors have some doubts on the inherent strength and longevity of this strength, given the multiples at which shares trade today.
This makes it very hard to value, as the company will see great returns as long as it continues to perform, and not only earnings will grow but valuation multiples will expand as well from the current low base, albeit that the contrary is the case as well. Here and now I continue to hold just a modest position which I initiated amidst the initial COVID-19 sell-off, looking to continued above average volatility to perhaps initiate again on dips, although a great third quarter and very solid fourth-quarter guidance provides real comfort for now.
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Disclosure: I am/we are long INMD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
