An Intriguing Investment Around the Coronavirus: SHARPS COMPLIANCE (SMED – NASDAQ)

Sharps Compliance (SMED – NASDAQ) is growing, on the cusp of profitability and has a topical angle – a business tied to the coronavirus, or COVID-19 as it is now referred to.

Sharps is a medical waste disposal company. Part of their business is the disposal of flu shots waste. So any uptake in flu shots, or the introduction of a new vaccine, boosts the business.

On their last call Sharps said that they are already seeing benefit from coronavirus worries: flu shots soared in January. 

The March quarter is the weakest for Sharps business. Orders average 400,000 for the quarter. 

Just in January, Sharps saw more than 200,000 orders.

This is not surprising. Even if a flu shot doesn’t give direct protection against COVID-19, people want every precaution.

Sharps will see a second boost when a COVID-19 vaccine is developed. So you see, it doesn’t matter if the coronavirus is a global pandemic, or a cure gets developed next week.

No matter what happens, millions of Americans will be getting more flu shots because of the fear surrounding this new flu strain – because Sharps will be handling much of the waste for that rollout.

 

Growing Business (Even With The Flu)

 

But Sharps isn’t just a moonshot on the coronavirus. This is company with a real and growing business.

The flu shot business works on mailbacks. Sharps offers a receptacle and mail-in program. Pharmacies and health care centers dispose of waste into a USPS approved box that is shipped to Sharps for disposal.

About 6 years ago Sharps decided to supplement the mailback business to try to boost growth and reduce flu shot seasonality. They started by offering an option for route-based pickup.

Route-based is exactly like it sounds – drivers pick up waste on a regularly scheduled basis. 

The business provides direct service to over 55% of the U.S. population. Route-based pickup has grown to make up 27% of revenue:

Source: Company Presentation

Sharps entered a third business called Medsafe in 2014. Medsafe collects, transports and disposes of unwanted or expired medication.  

The diversification strategy has worked. Customer billings ex-flu shots increased 36% for the second quarter, 32% fiscal year to date and 24% for the trailing 12-month period.

Their route-based business grew 19% in the last quarter. Unused medication solutions grew 72% in the quarter – the Medsafe install base grew from 2,900 to 4,500 year-over-year.

Mailback has grown as well. This is in part because of the ability to package mailback with a route-based solution.

In their 10-K Sharps said that 60% of their pipeline in fiscal 2019 was attributable to packaging route-based and mailback solutions to customers.

Overall, the picture is growth across the board.

Source: Sharps Compliance SEC Filings

Year-over-year revenue growth the last 3 quarters: 23%, 32% and 17%.

That’s why I can’t figure out analyst estimates, which are using $52 million this year and only $55 million next year. That seems way to low.

Growth has translated into operating leverage.  EBITDA has been increasing steadily and EBITDA margins have been close to 10% for 3 straight quarters.

Source: Company Financials, Sentieo

Source: Company Financials, Sentieo

 

QUICK FACTS

 

Trading Symbols:                           SMED

Share Price Today:                         $5.25

Shares Outstanding:                      16.2 million

Market Capitalization:                   $85 million

Net CASH:                                        $3 million

Enterprise Value:                            $82 million

2019 Consensus Revenue Est:     $52 million

EV/Sales                                           1.6x

2020 Consensus Revenue Est:     $55 million

EV/Sales                                           1.5x

 

This growth is reason to be bullish on its own. The coronavirus/flu shot angle only adds to the story.

 

 

CONCLUSION

 

To recap, Sharps has a lot going for it:

 

  • Growing revenue
  • Expanding EBITDA margins
  • Reduced seasonality
  • Coronavirus

But this might not be the right time to jump in. The stock had a BIG run up over the past couple weeks – boosted by progress on a vaccine and an upgrade from US brokerage firm Stifel.

That makes the stock vulnerable to a pull-back. While the coronavirus angle is enticing, it isn’t going to change the business overnight.

The long-run though – it looks bright, with revenue growth and EBITDA margin expansion. Together, that will be enough to drive the stock higher, with the virus only accelerating that trend.

 

EDITORS NOTE: Interest rates are going down again. If US interest rates ever go negative – which President Trump is on the record as favouring – gold prices will explode like you have never seen. US gold stocks will SOAR. To see my favourite gold stock – which has its growth engine in Nevada

CLICK HERE