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In the spring of 2022 I believed that Enovis (NYSE:ENOV), the medtech leftover of Colfax had some to prove. After the business spun off the welding business ESAB (ESAB), Enovis remained the surviving entity.
This medical business largely comprised the DJO Global purchase, which Colfax pursued in 2018 in a $3.1 billion deal. With few synergies seen between welding fabrication and medtech, this was the reason for the spin-off. While the business has seen solid growth, I am cautious given the highly adjusted earnings and recently higher leverage employed, as I am not willing to commit capital for this reason.
On Enovis
Enovis, which used to be known as Colfax, actually itself once was spun-off from Danaher (DHR). Following the separation of ESAB, Enovis became a $1.52 billion business, which generated $216 million in adjusted EBITDA upon the separation.
About two-thirds of these sales were generated in North America, mostly generated from prevention and recovery activities, as the company addresses a huge multi-billion ortho market, which in itself is split up across knee, hip, extremities, trauma, sports medicine and spine among others. This means that not only is Enovis competing with some large competitors, but it competes in a wide range of activities as well. Some of its peers include Smith & Nephew, Zimmer, Stryker and Johnson & Johnson, among others.
The company guided for 10-14% sales growth in 2022, with EBITDA seen at a midpoint of $255 million. However, as a standalone business, Enovis would likely incur about $15 million in a corporate cost allocation, for potential earnings seen between $2.20 and $2.40 per share.
With shares trading at $65, I was a bit cautious, as the business supported a $3.5 billion enterprise valuation. Based on sales of $1.5 billion, the resulting 2.3 times sales multiple looked quite modest, although the company traded at a demanding 28 times adjusted multiple. Lower margins (and fixing them) were key in this investment story.
Given this, I considered Enovis a show-me story amidst demanding earnings multiples, but very reasonable sales multiples.
Shares Are Stuck
Since the spring of 2022, shares have traded in a $45-$65 range, as they now trade at $51 per share, down 20% from the levels since May 2022. These negative returns over a two-year period indicate that shares have been lagging a great deal versus the wider market, creating real underperformance.
In the end, the company grew 2022 sales to $1.56 billion as the earnings numbers were complicated. The company posted GAAP losses equal to $0.25 per share, with adjusted earnings reported at $2.27 per share after no less than 14 adjustments. Adjusted for all these items, adjusted earnings came in at $124 million and while I am happy to adjust for many of these items, it does not include a $31 million stock-based compensation expense, as otherwise earnings came in around $1.70 per share.
The 2023 guidance was quite underwhelming. While organic sales growth was seen at 5-6%, adjusted EBITDA was seen at a midpoint of $260 million and adjusted earnings were seen between $2.15 and $2.30 per share. At the midpoint, this suggested even modest adjusted earnings declines.
In April of last year, the company acquired French-based Novastep, a minimally invasive surgery food and ankle solutions business with $20 million in fast-growing sales, as no purchase price had been communicated (at least upon the announcement of the transaction).
In September of last year, the company announced an EUR 800 million deal to acquire LimaCorporate S.p.a., a private global orthopedic leader which focuses on restoring of motion through an innovative portfolio of implant solutions. The acquisition is set to boost sales by $295 million, with its adjusted EBITDA contribution seen at $70-$75 million, marking superior margins compared to their own business.
And Now?
In February of this year, Enovis posted a 9% increase in full year sales to $1.70 billion, with organic growth reported at 8% as dealmaking only contributed to the results later in the year. The company posted adjusted earnings at $2.40 per share, but again, these earnings were very adjusted, with GAAP losses posted at $1.00 per share, as the gap between both metrics is very substantial.
Obviously, there were many moving parts amidst the two deals announced during the year, certainly that of LimaCorporate. Full year sales for 2024 are seen at a midpoint of $2.10 billion, plus or minus fifty million, largely driven by the purchase of Italian-based LimaCorporate which closed early in January.
Adjusted EBITDA is seen at $365-$380 million, the midpoint seen around $300 million if we exclude the contribution of LimaCorporate, as this EBITDA metric came in at $269 million in 2023. Not all this is driven by organic growth, after the company announced some smaller deals last year as well. Net debt was reported at $430 million, ahead of the deal with LimaCorporate.
In May, the company the posted first quarter results. Quarterly revenues rose some 27% on a reported basis to $516 million, with organic sales up 5%. That is part of the story, as the company continues to see a difficult earnings picture, with adjusted earnings reported at $0.50 per share, while GAAP losses were reported at $1.32 per share.
Following the quarter, the company updated the midpoint of the full year sales guidance to $2.11 billion, with the EBITDA guidance being hiked by three million to $368-$383 million. The adjusted earnings guidance was hiked by two pennies to $2.52-$2.67 per share. The modest earnings guidance hike was welcomed as the company reported a $1.27 billion net debt load, for a 3.4 times leverage ratio based on adjusted EBITDA seen around $375 million this year.
What Now?
Shares of the company fell from $55 to $51 per share in the wake of the first quarter results, as the higher leverage and heavy adjustments to earnings makes me very cautious, despite a modest increase in the full year guidance.
The 55 million shares now trade at $51 per share, for a $2.80 billion equity valuation. This means that the business is valued at $4.1 billion on an enterprise basis here, which quite frankly is somewhat disappointing. After all, the purchase of DJO Global back in 2018 already took place at a >$3 billion price, while the two deals last year came at an expense of around a billion.
Fortunately, the business has become a lot more diversified. Of the roughly half billion revenue number for the first quarter of this year, the company has revenues split pretty evenly between reconstructive sales and prevention & recovery segment. Reconstructive sales are split pretty evenly between extremities and hip & knee, while prevention & recovery segment is comprised out of bracing, footcare and recovery solutions.
Right now the company has seen multiples come down below 2 times sales, trades at a low double-digit EBITDA multiple, and about a 20 times adjusted earnings multiple. The trouble which I have with the valuation, despite solid organic growth, is that of high leverage, but moreover extremely aggressive adjusted earnings practices.
All in all, I am allured by the low sales multiples and solid organic growth rate reported by the business, but the issue is that of the heavy adjusted earnings and lately some leverage taken on by the business. Amidst this, Enovis remains a show-me story, and while appeal has improved a great deal, I am still not willing to commit capital just yet amidst too aggressive accounting and leverage practices.
