AngioDynamics: Restructuring Initiative May Not Go Far Enough

AngioDynamics Inc.'s (ANGO) latest quarterly results disappointed with sales coming in weaker than expected while management revised lower full-year estimates. Shares fell nearly -20% on the report and have lost more than half its value over the past year.

Across an extensive product portfolio of minimally invasive medical devices for cancer and vascular disease treatments, the story here is simply a softer demand for some key products between update cycles. Management has announced a strategy shift to move towards an outsourced manufacturing model, intended to drive profitability going forward.

While we believe the restructuring effort is a step in the right direction, we don't see enough positives in the outlook to suggest the stock will sustain a rebound from here. Ultimately, recurring losses and only tepid growth in the foreseeable future will likely keep ANGO volatile.

ANGO Earnings Recap

ANGO reported fiscal 2024 Q2 non-GAAP EPS of -$0.05, representing an adjusted net loss of -$2 million. Revenue of $79.1 million was down by -7.4% year-over-year, and below about $3 million below the consensus estimates. At the same time, excluding the impact of various divestitures over the past year including the dialysis business, pro forma growth is up 2.7% y/y.

The pro forma gross margin at 50.9% declined by 80 bps from the period last year, explained by the shifting sales mix between MedTech and MedDevice products.

While pro forma growth was positive for both those segments, the weakness that stood out was from mechanical thrombectomy business with "AngioVac" with sales down -11 % y/y in Q2 based on lower procedures volumes.

This was balanced by a stronger 18% increase in sales of "AlphaVac" following the FDA breakthrough designation received in August last year. Momentum has also been solid in the smaller "NanoKnife" product line where sales climbed 22.8% y/y.

Within the Med Device group, the 2.3% y/y pro form sales growth was driven by the angiographic catheter products and our ports, which grew 8% and 5.5%, respectively.

During the earnings conference call, management projected confidence in the long-term outlook despite the tepid trends that failed to live up to expectations. From there, the group is lowering its full-year revenue target to a range between $320 and $325 million, compared to a prior mid-point estimate above $330 million.

Similarly, the adjusted EPS loss for 2024 is now expected to come in wider and closer to -$0.40 per share compared to the range around -$0.30 announced in Q1.

We mentioned the restructuring effort. The idea here is that while 80% of Med Tech products are currently manufactured by third-party suppliers, the company now intends to transition completely away from manufacturing.

Beyond some immediate charges, the expectation is for operating margins to trend higher over the long run with upwards of $15 million in annualized savings. On this point, management is setting a goal of reaching profitability by fiscal 2027.

AngioDynamics ended the quarter with $61 million in cash against effectively zero debt. While this level of liquidity is a strong point in the company's fundamental profile, the expectation for recurring losses through at least the next two years may limit the financial flexibility.

What's Next For ANGO?

The good news here is that AngioDynamics has an established market presence with a leadership position in several areas of specialized venous devices and oncology surgical solutions. The bullish case is that there is room to consolidate the global market shares in what remains a growing segment while executing an effective commercialization strategy.

When looking at ANGO as an investment, our take here is that it's hard to get excited about the stock considering just single-digit pro forma growth and the lack of a major catalyst to accelerate trends in the near term. The company is moving forward with submissions to the FDA for expanded product indications, but it's unclear if any of those clearances would move the needle in terms of operating momentum.

In terms of valuation, we can use the company's measure of adjusted EBITDA in Q2 which is annualized to around $7 million. This is in the context of the current enterprise value at $185 million implying a 26x EV to EBITDA multiple. In terms of sales, the path to reach $325 million in revenue this year suggests an EV-to-revenue multiple under 0.6x which is consistent with negative earnings and soft operating trends.

So what we have here is a company that has potential with a financial cushion where shares will likely remain under pressure given the lack of clarity on a timetable for a financial turnaround.

Final Thoughts

We rate ANGO as a hold acknowledging the downside risk that results continue to underperform but also recognizing that the extreme selloff in recent months has likely already incorporated many of the company's weak points. For long-term shareholders, it's probably too late to sell while we'd recommend anyone looking at this stock for the first time to avoid it for now.

On the upside, we'll want to see some evidence that growth is re-accelerating with trends from the Thrombus management products as well as the firm-wide gross margin being key monitoring points.

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