My colleague G A Chester delivered a positive article on Tuesday about the prospects for medical devices company ConvaTec (LSE: CTEC). It was a good call because today, on the release of the half-year results report, the share price is up more than 15% at 183p. Should I jump aboard the recovery story here?
Turning itself around
The firm is a “global” medical products and technologies company focused on therapies for the management of chronic conditions, with “leading market positions” in advanced wound care, ostomy care, continence and critical care, and infusion devices. That’s a tick on the checklist for me because I like the sector.
And I was tempted to load up with the stock in February when it hit 120p after plunging 20% on the release of full-year results for 2018. Sadly, I failed to act back then, yet the share price has been steadily rising ever since. And for good reason: the operational recovery seems to be gathering pace.
Executive chairman Rick Anderson said in today’s report that all the firm’s franchises delivered organic growth in revenue in the second quarter. However, he cautioned that there is “more work to do.” Yet he believes the company is “well-positioned” to meet its objectives for the full year. City analysts following ConvaTec expect earnings to lift by a percentage in the high teens for 2019.
We only have to wait until 30 September until incoming chief executive Karim Bitar takes control. I see change at the top as a positive when it comes to turning businesses around. Indeed, Anderson explained that the priority in the second half is to improve execution and Bitar’s fresh eyes and leadership look set to play a big part in that.
Positive change
There’s a lot of positive change happening already in the enterprise though. The firm expects revenue to grow in H2, and part of that will likely be driven by a “more targeted and effective” salesforce in the US wound business along with ongoing recovery in other divisions.
The company invested $14m to establish its “transformation initiative” during the first half, aimed at embedding “more discipline and better execution into the business.” Such investment is set to ramp up in the second half to around $40m for the whole year. I like the sound of that. And if the main issue leading to ConvaTec’s previous multiple profit warnings was one of poor execution, that’s encouraging news too, because such problems are often fixable. If the business model was irreparably broken, or just plain didn’t work, the firm’s turnaround problems would have looked grim. Happily, that’s not the case, it seems.
At the current share price of 183p, the forward-looking price-to-earnings ratio for 2019 sits just below 17 and the anticipated dividend yield is close to 2.5%. Meanwhile, although revenue in the first half came in flat “on an organic basis,” the firm saw “an improving revenue trend” in the second quarter with growth of 2.1%.
I’m optimistic about the company’s forward prospects and would aim to buy into the shares on dips and down-days now.
