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It’s too early to declare that AngioDynamics (NASDAQ:ANGO) is in the clear after years of restructuring and disappointing financial results, but the situation looks better to me and the stock certainly reacted well to fiscal fourth quarter results on July 16. Up more than 25% in a day, that pulled AngioDynamics’ performance up to about an 8% gain since my last update, an almost 10% outperformance relative to the broader med-tech space.
I like the sequential revenue gains in the company’s core growth drivers, and while management’s guidance suggests a retreat from some of the margin improvement seen this quarter, the restructuring efforts do appear to be driving some improvements. Expectations are still rather low, which isn’t unreasonable given the performance track record, but investors looking for a speculative and perhaps contrarian turnaround story – I say “perhaps” because I don’t think AngioDynamics is followed enough to truly be a contrarian call – this is a name worth considering.
Encouraging Growth And Margin Progress
There is still a lot of work to do to get AngioDynamics on a path to sustainable and profitable growth, but fiscal fourth quarter results suggest that the company is moving in a better direction.
Revenue rose about 2% year over year on a pro forma basis and 8% on a sequential basis, basically meeting expectations. The legacy Med Device business saw revenue decline 4% year over year and improve 4% sequentially, with management blaming weaker results on disruptions from business sales and ongoing restructuring efforts. The Med Tech business saw over 11% yoy and 14% qoq growth, with Auryon up 12%, NanoKnife up 43%, and mechanical thrombus management down 2%.
Gross margin was basically flat on an annual comparison, but up more than three points from the prior quarter (to over 54%), with Med Tech gross margin down 70bp yoy and up 260bp qoq to 64.1% and Med Device coming in at 47.4% (down 60bp yoy and up 300bp qoq). Adjusted operating loss, inclusive of amortization, shrank about $2M (to $5.7M on $71M in revenue), while adjusted EBITDA rose 15% to $1.5M (please note, AngioDyanmics’ definition of adjusted EBITDA adds back stock option expense).
Guidance for the next fiscal year was mixed in my view. The revenue growth rate of 5% at the midpoint was basically in line with expectations, but I had hoped to see a little more in terms of gross margin guidance (52% to 53%) and/or adjusted EBITDA, which management guided to a loss of $2.5M to breakeven. The $0.40 adjusted EPS loss (the midpoint of guidance) is about $0.09/share better than what the Street was expecting.
Med Tech Execution Remains The Key Now
I don’t write off the expectation that the legacy Med Device operations should continue to generate cash flow, but the reality is that these businesses are not going to transform the long-term financial performance of the company, nor drive a meaningful rerating. Were the company to find a good enough deal, I’d certainly support selling the venous, peripheral, and port businesses, as I think the company is going to be sorely challenged to drive meaningful growth here over the next decade, particularly given lackluster competitive positions.
Whatever ends up happening with the Med Device businesses, Med Tech is what’s going to make this stock work in the coming years, but a lot rests on management’s ability to execute and compete effectively in markets that have no shortage of therapeutic options.
Auryon grew 12% yoy and 10% this quarter, and I continue to believe that this product is an underrated option for in-stent restenosis in peripheral vessels, as competing products from Abbott (ABT) and Medtronic (MDT) don’t handle thrombus well, while Boston Scientific's (BSX) option doesn’t deal well with fibrotic lesions.
That said, it’s important to keep expectations in check. While management boasted of taking share in the market (and indeed, I think 12% growth does point to worthwhile share growth), Johnson & Johnson's (JNJ) Shockwave generated significantly more revenue in a single month ($77M) than Auryon generated in a quarter ($13M), with like-for-like performance in peripheral indications more likely on the order of $50M-$55M/quarter versus Auryon’s $13M.
While performance in the mechanical thrombectomy business was held back again by weaker results from AngioVac, AlphaVac rebounded nicely on a sequential basis (up 68%). With AngioDynamics now having FDA and EU clearance to sell AlphaVac for use in pulmonary embolisms, I do expect growth to accelerate from here. Competition from Inari (NARI) and Penumbra (PEN), among others, is still a meaningful issue, but the pulmonary embolism market remains large ($2B-plus) and growing, as clinicians are increasingly turning to mechanical treatments over anticoagulant therapy given efficacy and safety considerations.
Last and not least is NanoKnife. The 12-month follow-up period for the PRESERVE study will be finishing up shortly, and management seemed to tip their hand with respect to the study outcome, as they mentioned expecting FDA approval for the prostate indication before the end of calendar 2024.
Obviously, the outcomes of the PRESERVE study will significantly inform future expectations for the revenue potential in the prostate indication. There is no shortage of therapeutic options, including new drug therapies (like ADCs), stereotactic body radiation therapy (a form of radiation therapy that is faster, more effective, and safer to surrounding tissue), and radiopharmaceuticals.
Even so, the NanoKnife procedure is not particularly cumbersome and it preserves future treatment options; if roughly half of new intermediate-risk prostate cancer cases (the intended indication of the PRESERVE study) are eligible for the NanoKnife procedure, that supports an annual addressable market of $500M-$600M (assuming an average of four probes per procedure).
The Outlook
I’m expecting around 7% annualized revenue growth from ANGO over the next three years and longer-term growth in the 5% to 6% range. I think management’s near-term guidance for double-digit Med Tech growth is achievable, but I think it is once again fair to point out that executing on growth opportunities has long been this company’s Achilles heel, so there is really no margin of error here when it comes to maximizing the value of Auryon, AlphaVac, and NanoKnife.
I’ve pushed out my expectation for double-digit EBITDA margin to FY’27, although I think they’ll be annualizing at double-digit margin in FY’26. Likewise, I still think double-digit free cash flow margin is possible at less than $500M in revenue, but it’s going to take some time to get there. Even so, mid-single-digit weighted average FCF margin can support worthwhile cash flow.
Discounting those cash flows back, AngioDynamics shares still look undervalued on free cash flow below $9, and this is not a particularly generous valuation methodology for smaller medical device companies.
Using growth and margin-based EV/revenue is a little more complicated, but I do still think the shares look undervalued. If I use my FY’27 EBITDA margin estimate, I get a fair EV/revenue multiple of 1.4x. Applying that to FY’26 revenue and discounting back gets me to about $11.50 today. Likewise, if I ignore the Med Device business entirely and value ANGO only on Med Tech, I can support a 4x multiple and a $13.50 fair value.
The Bottom Line
Valuation is never an exact process and there’s no value in pretending that it is. Even so, I think multiple approaches point to higher potential value here provided that management continues to drive good results from its lead growth products. There are still valid questions about whether these key drivers can truly hold up against stiff competition over the long term, but today’s valuation is not demanding for investors who feel more confident on the basis of recent results.
