The first four months of 2019 have seen shares in disinfection specialist Nanosonics (ASX:NAN) soar almost 80% higher, as the business continued its successful expansion and posted another record profit result for the first half. But, with the company hitting an eye-watering P/E of over 140 by the end of April (on a trailing 12-month basis), shares finally ran out of puff.
Since then, Nanosonics has lost around 17% of its value. Which begs the question, is this a good buying opportunity, or are shares still too expensive?
What does Nanosonics do?
Nanosonics manufactures and sells a high level disinfection unit for ultrasound probes, the Trophon EPR, which is increasingly becoming the gold standard for disinfection procedures. Sales have almost tripled in the past few years, and the business continues to see its installed base grow at double-digit rates. Despite this rapid expansion, Nanosonics estimates it has only captured around 16% of the total market opportunity.
The business has a ‘razor and blade’ model, providing it with very ‘sticky’, high margin, recurring revenue thanks to the sale of consumables. As the installed base grows, and as usage increases, the potential here is significant.
The business has no net debt, mountains of cash, strong sales momentum, a good industry tailwind, market leading positioning and capable & aligned management. The market is right to attribute a generous premium to this world-class business.
Are shares good value?
Despite the pull-back in the share price, Nanosonics is still trading at a lofty P/E (trailing) of 117x, or a Price-to-Sales ratio of about 17x. Although these are insane levels for mature companies, Nanosonics is expected to sustain strong rates of growth for many years to come. Indeed, assuming we see first half sales momentum continue, we could expect total revenue to grow by around 35% for FY2019 and, given the operating leverage of the business, net profit should exhibit much stronger growth.
In fact, Nanosonics made more than double the profit in the first half of this year than it did for the entirety of 2018.
Ranked #9 on Strawman, Nanosonics has delivered some solid returns for many of our members and yet, on a consensus basis, remain below the community’s valuation. Click below to read the full report:
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this year to hit an all time high of $5.02