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It’s like stealing money. The market gives and gives and $$$MR. MARKET$$$ takes and takes. Today I sold CMN at 29.00. That’s a 16% gain over my (3:2 split-adjusted) purchase price of 25.07 in only 12 weeks. Can you do that? You? You?? YOU??? The market tries to do it but it cannot. Over the same period, S&P 500 was down 3.3%. So the market is a LOSER and $$$MR. MARKET$$$ is a WINNER. That’ means I have 66 consecutive profitable trades of 15% or better. That’s what Sammy Sosa hit 66 home runs, without the use of steroids.
That was like when I was a junior in college. I went out to the ATM machine to get monies to go out drinking. I was accosted by a smaller human who professed to have a weapon in his possession and demanded my money. I said, “Hold on man, it’s in my sock.” So I reached down to my shoes with my left hand, then while he was watching all of that, I delivered my right hand across his jaw. Then when he was moving like a sine wave on the pavement, I took HIS wallet and went to Smokey Joes where I purchased ale for all my friends. You sees? You sees what you get when you mess with $$$MR. MARKET$$$. So it’s kind of like stealing, but it really isn’t.
The good news is that there will be another $$$MR. MARKET$$$ winner forthcoming, but first you must publicly declare, in my forum, just who is the greatest stock picker on the planet.
I am HUGE!!!
$$$MR. MARKET$$$
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12-31-2004, 12:28 AM
mrmarket
Administrator
CMN ==> The Christmas Winner!
It's christmastime. You wake up in the morning and you can’t tell how cold it is until you go outside. You can't tell how deep a puddle is until you step into it. You can't tell which way the train went by looking at the track. You can always tell a Harvard man, but you can’t tell him much. How about when you go to your doctor and he sticks an endoscope up your ass so he can tell your colon to “say cheese”? How do you know that someone didn’t put that endoscope in his mouth before it went into your ass? Do you know where that endoscope has been?? Well…you can’t tell.
There is so much in life that you just can’t tell. Busy operating, examination and emergency rooms must endlessly disinfect their medical devices. It's a dull but critical task. Any slip-ups give germs a chance to spread. Automating the procedure could reduce that chance. That’s why it makes so much sense to invest in a company that Cantel.
Today I bought Cantel Medical (CMN) at 37.61. I will sell it in 4 to 6 weeks at 43.49. Here’s why I like Cantel.
Cantel Medical Corp. is a leading provider of infection prevention and control products and services. They specialize in the following segments of the infection prevention and control market:
• Medical device reprocessing systems and sterilants/disinfectants for renal dialysis and endoscopy
• Diagnostic imaging and therapeutic medical equipment principally focused on endoscopy
• Hollow fiber membrane filtration and separation technologies for medical and non-medical applications
• Water treatment equipment and services for medical, pharmaceutical, and other diverse applications
• Scientific instrumentation
• Specialized packaging for the safe transport of infectious and biological specimens
Cantel has four wholly-owned operating subsidiaries :
• Minntech Corp (engaged in the development, manufacturing and marketing of disinfection/reprocessing systems and other products for renal dialysis as well as filtration and separation products for medical and non-medical applications.)
• Carsen Group Inc., its Canadian subsidiary, Carsen Group Inc., Cantel markets and distributes medical equipment (including flexible and rigid endoscopes), precision instruments (including microscopes and high-performance image analysis hardware and software) and industrial equipment (including remote visual inspection devices).
• Mar Cor Services, Inc., , based in Skippack, PA and founded in 1971, provides water treatment equipment design, project management, installation, maintenance, service deionization, and mixing systems to the medical community. Mar Cor also offers high purity water systems to the research and pharmaceutical industries. Mar Cor operates in 12 cities in the U.S. with three resin regeneration plants strategically located in Skippack, PA, Chicago, IL, and Atlanta, GA. When I was in graduate school, I told Mark Irwin that I would play golf with him at 7 am on Friday morning. The Thursday night prior, I was out drinking til 6:30 am. Then Mark Irwin showed up at my door and told me we had to go golfing. We went to play at a course in Skippack, PA…called Skippack. I smelled like gasoline.
• Saf-T-Pak Inc. Saf-T-Pak Inc., is a niche company providing products and training services for the safe transportation of infectious and biological specimens such as human and animal blood, tissue samples, vaccines, etc. Ewwwwwwww! Mr. Arthur Rutledge, President of Saf-T-Pak commented, "There are an estimated one billion specimens shipped annually in the United States alone. The U.S. Department of Transportation recently issued new regulations that broadened the class of specimens required to conform to strict packaging standards. Given the rise in international shipments of test samples for AIDS, SARS, Mad Cow Disease, Asian Bird Flu and numerous other maladies, this regulatory impact presents a considerable increase in the need for Saf-T-Pak's unique, patented, and secure packaging systems. It is exactly due to this anticipated rise in demand that we are excited about joining forces with Cantel who will aid immeasurably in helping us expand our business." Imagine getting in a car accident with a truck carrying this stuff? Ewwwwwwwwwww! Probably no worse than some of the bars I used to go to when I was in my 20’s. Do you know what kind of AIDS and Herpes are in those joints? Are those beers done yet?? Actually, growth prospects for Saf-T-Pak are strong because safety standards for shipping such materials are high, with many U.S. and international agencies enforcing the rules.
• The company's fifth operating company, Biolab Equipment Ltd., is a wholly-owned subsidiary of Carsen. The Biolab Group, founded in 1969, specializes in "ultra-pure water" for the medical, pharmaceutical, biotechnology, research and semiconductor industries. With operations in Oakville, Ontario, Dorval, Quebec, and Skippack, Pa, Biolab provides a wide range of high-performance products from simple point of use service deionization systems up to turnkey, large-volume complex Pharmaceutical/Biotech systems.
Cantel has demonstrated that is has premier customer service and quality products such that it has been able to grow its business through market penetration. The company’s principal end-markets are US dialysis treatment centers and Canadian hospitals. Approximately 61% of sales are derived from the US; 31% from Canada; and 8% from Europe, Asia and Latin America. Also management has been open about its intention to grow through acquisition and build a larger company while remaining a leader in niche markets. Minntech markets its products in the United States through a direct sales force and through distributors. Minntech B.V., Minntech's Netherlands subsidiary, is the base for its European operations. Minntech Japan K.K., Minntech's Japan subsidiary, and Minntech Singapore, a branch office of Minntech B.V., serve the Asia/Pacific market.
MediVators sells its endoscope reprocessing products in the United States under an exclusive distribution agreement with Olympus, and internationally through various foreign distributors.
Carsen markets its products for each business segment through separate, direct sales forces comprised of its own employees.
Most of the Company's direct sales forces are compensated on a salary and commission basis.
I almost forgot about the endoscopes. What is it with these endoscopes anyway? I know it’s important for medical science, but what if you were the guy who invented these things? You’d be at a Little League game and someone would ask what it is you did for a living, and you’d have to say that you invented a camera that can look inside someone’s ass. Huh?? He should have invented some device that would enable you to go to the bathroom on Saturday morning without having to get out of bed. Now THAT would have been a good invention. Sorry, I just don’t know about a camera that goes up someone’s ass. Actually, an endoscope is a device comprised of an optical imaging system incorporated in a flexible or rigid tube that can be inserted inside a patient's body through a natural opening or through a small incision. Endoscopy, the use of endoscopes in medical procedures, is a valuable aid in the diagnosis and treatment of various disorders. Endoscopy enables physicians to study and digitally capture an image of certain organs and body tissue and, if necessary, to perform a biopsy (removal of a small piece of tissue for microscopic analysis). I actually had one of those things done to me, but he went down my throat instead of up my ass. Still, they gave me excellent drugs and I had to skip work or I would have crashed my car on the way in.
A flexible video endoscope consists of a high resolution solid state image sensor contained in a flexible tube, which can be inserted into irregularly shaped organs of a patient's body, such as the large intestine. The control body of a flexible endoscope incorporates a steering mechanism and contains working channels and is connected to an external light source and processor, which permits a physician to view inside a patient's body. The working tip of a flexible endoscope contains a lens and a solid state image sensor and, in most cases, depending on the application, an outlet for air and water. Most flexible endoscopes also have internal working channels which enable accessories such as biopsy forceps to be passed to the tip. The solid state image sensor enables a live image to be transmitted electronically to a monitor, which image can be viewed by a physician and nurse as a medical procedure is being performed. "Nurse, come look at this! I've never seen such a turd before!!" The flexible video endoscope and its related accessories comprise the majority of Carsen's flexible endoscopy sales. I wonder if this video is more interesting than the Paris Hilton video in the medical community?
Minntech's renal dialysis treatment products include a line of acid and bicarbonate concentrates used by kidney dialysis centers to prepare dialysate, a chemical solution that draws waste products from the patient's blood through a dialyzer membrane during the hemodialysis treatment. Cantel provides the industry's most complete line of these concentrates in both liquid and powder form for use in virtually all types of kidney dialysis machines.
In response to government-mandated cost containment measures, in the late 1970s many United States dialysis centers began cleaning, disinfecting, and reusing dialyzers (artificial kidneys) in a process known as "dialyzer reuse" instead of discarding them after a single use. Approximately 80% of U.S. dialysis centers employ multiple-use dialyzers. Dialyzer reuse is also widely practiced throughout most of Eastern Europe, the Middle East, Africa and the Asia/Pacific regions. Sales of reprocessing products have continued to grow in these markets. In order to further improve support of its Asia/Pacific distributors, Minntech maintains an Asia/Pacific representative office in Singapore.
The growth of dialyzer reuse in Western Europe has been limited. However, due to pending changes to the reimbursement system in several key markets, such as Germany, this situation should improve. Minntech's dialyzer reprocessing products include the Renatron(R)II Automated Dialyzer Reprocessing System, the Renalog(R)III Data Management System and, the RenaClear(TM) Dialyzer Cleaning System, together with Renalin(R) Cold Sterilant and Renalin(R)100, both peracetic acid based sterilants that replace less environmentally friendly high-level disinfectants such as formaldehyde. Actril(R) Ready To Use Cold Sterilant, primarily used as a dialysis machine disinfectant, and Minncare(R) Cold Sterilant, utilized for water line disinfection, are also part of Minntech's liquid chemical germicide product line.
The Renatron(R) reprocessing system, first introduced in 1982, provides an automated method of rinsing, cleaning, sterilizing, and testing dialyzers for multiple use. The Renatron(R)II, the most current version of the product introduced in 1990, includes a bar-code reader, computer, and Renalog(R)III software system that provides dialysis centers with automated record keeping and data analysis capabilities. The Renatron(R) system is faster, easier to use, and more efficient than competitive automated systems. The Renatron(R) system is one of the top selling automated dialyzer reprocessing systems in the world.
In May 2001 Minntech introduced the Renaclear(TM) Dialyzer Cleaning System, the first dedicated automated dialyzer cleaning system. The system removes blood and organic debris from difficult-to-clean dialyzers before reprocessing, a process known as "precleaning." Precleaning is common in dialysis units because the practice can help extend the useful clinical life of a dialyzer. When dialyzers are precleaned by hand, many dialysis facilities remove the dialyzer header caps (the end caps of a dialyzer) to more effectively rinse out heavy blood debris. However, opening the dialyzer in this fashion can increase the risk of contamination of the dialyzer components and damage to the membrane. The Renaclear(TM) system features a high-powered fluid injector that cleans dialyzer headers (the two internal ends of a dialyzer) without requiring removal of the header caps. The Renaclear(TM) Dialyzer Cleaning System is designed for use with peracetic acid-based Renaclear(TM) Disinfectant. It's like when I was a bartender at Doc Watsons. Instead of just taking the empty mugs off of tables and pouring beer back in them, I used to throw them in the sink and pour water on them before I put the beer back in them.
Two of Minntech's competitors (Fresenius Medical Care AG ("Fresenius") and HDC Medical, Inc.) have introduced peracetic acid-based dialyzer reprocessing germicides, entering a market previously dominated by Minntech's Renalin(R) Cold Sterilant product. However, Renalin(R) remains the only reprocessing chemical that has been validated for use with the Renatron(R) dialyzer reprocessing system and cleared for marketing as such under section 510(k) of the Federal Food, Drug and Cosmetic Act. Renalin(R) is also the only dialyzer reprocessing germicide that carries a sterilization claim in the United States market. Minntech has informed its Renatron(R) customers that it is unable to guarantee the integrity, reliability, and chemical interaction of alternative germicides with the Renatron(R) system. Minntech believes that this validation, coupled with Minntech's extensive dialyzer reprocessing education, administration, and technical support services, are strong competitive advantages for its product.
Within the dialysis industry manufacturers have been acquiring chains of dialysis treatment centers over the past several years. These manufacturers have a built-in customer base for their products. However, Minntech views its manufacturer-only status as a competitive market advantage. Minntech believes that many dialysis treatment providers do not want to purchase hemodialysis supplies from manufacturers who also provide dialysis service and are, in effect, their competitors.
Two of the Company's competitors (Gambro Healthcare, Inc. and Fresenius) have made public disclosures of their intent to increase the use of single-use dialyzers which, at some dialysis centers owned by these companies, could impact Minntech's Renatron reprocessing equipment at such centers. Presently, the utilization of single use dialyzers continues to be significantly more expensive than dialyzer reuse and, as such, the number of Minntech-supplied reuse programs is not expected to decrease significantly.
Cantel holds a dominant position in the US market for dialyzer reprocessing systems, and it ranks third in the market for dialysate. While dialysis will probably not grow significantly, it is a core non-cyclical business and will be a springboard, via Cantel’s existing channels of distribution , for growth in other products that may become available through acquisition. In August 2003, Cantel acquired two water treatment companies for about $16 million (plus up to $3 million depending on performance), bringing in-house the capability to design, manufacture, market and service water treatment systems. The business is still small ($20 million in annual sales) and normalized gross margins are expected to be lower than Cantel’s other businesses (30% versus 38%), but it provides a platform for future growth and a critical product to sell to dialysis customers, which must have a reliable source of purified water. It also extends Cantel’s potential customer base to include non-medical industries that require clean water in their manufacturing processes, and is expected to produce recurring revenues for the Filtration and Product Service segments. The company’s low leverage and strong cash flow provide it with the flexibility to finance a sizable transaction. Cantel’s debt/equity ratio is only 0.19, compared to the Industry Average 0.40.
Cantel’s balance sheet remains rock solid. As of January 31, 2004, the company had $10 million of cash and $44 million of net working capital. Outstanding debt of $26 million was just 1.4x LTM EBITDA and 25% of total capitalization, and capital expenditure requirements have historically been a modest 1.0%-1.5% of sales. For the 12 months ended January 31, 2004, EBITDA was over $18 million and the company generated $16 million of Free Cash Flow. Lastly, just $2 million was drawn under two revolving credit facilities that provide up to $24 million of availability, providing significant additional borrowing capacity. Towards the end of this year, CMN nearly doubled their cash position from where it was at the end of January 2004.
CMN has enjoyed strong price appreciation over the past year (stock up over 130%) and is currently trading close to its 52-week high. Very very pretty:
The acquisition of the water treatment business has had a positive impact on the stock. Despite the recent appreciation, investors are rewarded by a conservatively-managed company that holds leading positions in attractive niche markets and has several new identifiable sources of growth. The growth story has come from CMN selling more and more consumables vs. durable goods. When people think about HP, they know they sell inkjet printers, but the big buckaroos come from selling the ink cartridges, CMN’s strategy is no different. Their cleaning products should boost margins and lead to more repeat business. It's the only chemistry compatible with nearly all endoscopes, which are fragile and prone to damage from similar products on the market. Would you want a broken endoscope inserted into your anus?
Cantel also makes automated systems that clean, or reprocess, endoscopes. There's room to grow that business because half of all endoscopes are cleaned manually. Manual cleaning isn't as effective, so there's more chance of infection. It's also a dirty job. Workers are exposed to disinfectant fumes and residue. As a result, the hospital workers prefer the Cantel products. Sterilization has a lot of room for a lot of growth. Although endoscopes generally can be manually cleaned and disinfected, there are many problems associated with such methods including the lack of uniform cleaning procedures, personnel exposure to disinfectant fumes and disinfectant residue levels in the endoscope. Cantel believes its disinfection equipment offers several advantages over manual immersion in disinfectants. The disinfectors are designed to pump disinfectant through all working channels of the endoscope, thus exposing all areas of the endoscope to the disinfectant, resulting in more thorough and consistent disinfection. The level of disinfection to be achieved depends upon many factors, principally contact time, temperature, type and concentration of the active ingredients of the chemical disinfectant and the nature of the microbial contamination. This process can also inhibit the build up of residue in the working channels. In addition, the entire disinfection process can be completed with minimal participation by the operator, freeing the operator for other tasks, reducing the exposure of personnel to the chemicals used in the disinfection process and reducing the risk of infectious diseases. The disinfectors also reduce the risks associated with inconsistent manual disinfecting. This disinfection contact time is currently the fastest available on any disinfectant product sold in the United States. So if you have to go to the hospital, make sure you ask if they manually clean their endoscopes or if they have Cantel equipment that cleans them. If they manually clean them, then the employees are going to be all goofy and unhappy from the fumes. Not good for your chances in the hospital going forward.
The core of Carsen was a distribution agreement with Olympus Optical Co. Ltd. Cantel has a customer sharing agreement with Olympus Camera. This is a different company than the one that operates Olympic Gardens in Las Vegas. Initially, Cantel sold Olympus products in Canada, where most of its endoscope product demand still comes from. Such sales make up about 45% of revenue today. Before buying Minntech, 75% of sales came from Canada.
Minntech sells 80% of its dialysis products in the U.S. Olympus makes 75% of all endoscopes in use today and remains an important Cantel customer.
Cantel is a Titan in the medical industry. Just like when $$$MR. MARKET$$$ walks into the gym and the other weight lifters scatter like rats, Cantel does the same to its competition. The Company believes that the world-wide reputation for the quality and innovation of its products among consumers, the Company's reputation for providing quality product service, particularly with respect to endoscopy and surgical and endoscope reprocessing products, the numerous customer contacts developed during its lengthy service as a distributor of Olympus products and the distribution arrangement for certain MediVators endoscope reprocessing products with Olympus, give the Company a competitive advantage with respect to certain of its products.
The fundamental story sounds great. So where’s the beef? CANTEL MEDICAL CORP. reported net income of $3,107,000, an increase of 73%, or $0.29 per diluted share, on sales of $45,342,000, an increase of 23%, for its first quarter ended October 31, 2004, as compared with net income of $1,795,000, or $0.18 per diluted share, on sales of $36,849,000 for the quarter ended October 31, 2003. Of the 23% increase in net sales, 20% was from the Company's core businesses and 3% was from the Saf-T-Pak acquisition in June 2004.
CMN banked $170 million in revenue in 2004 and had EPS of $1.05. For fiscal 2005, sales will increase 25% to $213 million due to geographic expansion in the Water Treatment segment, which is currently concentrated in the Northeastern US, the additional products that will be distributed to dialysis customers along with the revenues from the recent acquisition. The Company believes that it has the opportunity to continue increasing its marketshare in the endoscope reprocessing segment. The majority of its product service segment is located in Canada where the Company's marketshare in its flexible endoscope service business is substantial; therefore, growth opportunities for its existing service business may be limited without the addition of new product servicing opportunities.
Their 5 year goal is to be a $500 million dollar company. A number of positive developments have improved the company’s future growth prospects, including the recent entry into the water treatment business, a stronger Canadian healthcare market, and the introduction of an updated Endoscope Reprocessor in Europe. There is no single company that is directly comparable to Cantel because of the many business segments in which the company operates. Most of Cantel’s competitors are divisions of much larger public companies or are private, resulting in a limited public company peer group. This will translate to EPS of $1.43 per share in fiscal 2005. If you take these earnings and multiply it by today’s PE ratio of 32, you get a stock price of 45.76 which is well past my selling target. In fact, CMN trades below the industry valuation of 40, which would mean that its share price could go as high as $57, through PE expansion.
Actually, the demographics favor this growth. People are living longer and, as a result, require more medical care. I have not seen anything that will reverse this trend, other than extreme sports. About 2 million people get infections each year in U.S. medical facilities. Around 75,000 die from the infections. U.S. hospitals spend $4 billion a year treating infections. Insurance costs exceed $5 billion. That's money that can be plowed back into Cantel's products, with no net drain on expenses to patients or hospitals.
The depth and experience of Cantel’s management team puts the company in a strong position to pursue its long-term growth objectives. Many of the company’s senior executives and board members have a long history with Cantel, and directors and officers have a significant financial stake in the company, together owning 30% of fully diluted shares. The company’s largest shareholder is its Chairman, Charles Diker, who owns 23% of the stock either directly or through family members and affiliates. James Reilly has been CEO for 15 years, and comes across as a strong, disciplined leader who has surrounded himself with very experienced executives. The reason for this is CMN’s awesome employment termination plan which I list below:
4. TERMINATION OF EMPLOYMENT. The provisions of Section 1 of this Agreement notwithstanding, this Agreement and Employee's employment hereunder may be terminated in the manner and for the causes hereinafter set forth, in which event the Company shall be under no further obligation to Employee other than as specifically provided herein:
4.1 If Employee is absent from work or otherwise substantially unable to assume his normal duties for a period of sixty (60) successive days or an aggregate of ninety (90) business days during any consecutive twelve-month period during the Employment Period because of physical or mental disability, accident, illness, or any other cause other than vacation or approved leave of absence, the Company may thereupon, or any time thereafter will such absence or disability still exists, terminate the employment of Employee hereunder upon ten (10) days' written notice to Employee.
4.2 In the event of the death of Employee, this Agreement shall immediately terminate on the date thereof.
So what the company is telling you, is that if you are dead, they will fire you. That means employees have big incentives to work harder. The boss is not dead, and here’s what he has to say about his company:
Mr. James P. Reilly, President and Chief Executive Officer of
Cantel, commented, "Increased sales and generally improved gross
margins of our core business segments contributed to the outstanding
operating results for our first quarter ended October 31, 2004."
Reilly added, "With the first quarter results as a base and the
anticipated improvement from our restructured water treatment and
filtration group, we expect continued strong operating results for the
balance of fiscal 2005." Reilly further added, "We are continuing to
aggressively search for acquisitions of companies providing products
and services in the infection prevention and control markets." If you don’t believe him, you can call him. This is his phone number: 973-890-7220.
Actually what makes Reilly a great boss is the company’s car plan:
3.5 USE OF AUTOMOBILE. During the Employment Period, Employee shall be entitled to the use of an automobile leased or owned by the Company in connection with the Company's business. The make and model of the automobile shall be reasonably satisfactory to Employee, provided that the Company's monthly payments in respect thereof (exclusive of the expenses referred to in the following sentence) shall not exceed $700. In lieu of the foregoing, the Company may pay Employee an automobile allowance of $700 a month. Employee shall be entitled to receive reimbursement for reasonable out-of-pocket expenses, including, without limitation, cost of gas, oil, insurance and other costs incurred by Employee in operating and maintaining the automobile; provided, however, that Employee shall be responsible for keeping appropriate records regarding the use of said automobile, as instructed by the Company or its accountants.
The industrial technology equipment distributed by Carsen, Cantel’s subsidiary, is generally purchased by large industrial companies including the oil and gas industry. I believe that after the Orange Bowl, Carsen’s endoscopes may be used on the Titans, and they will find a large volume of oil and gas.
$$$MR. MARKET$$$
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I am HUGE! Bring me your finest meats and cheeses.
- $$$MR. MARKET$$$
That was like when I was a junior in college. I went out to the ATM machine to get monies to go out drinking. I was accosted by a smaller human who professed to have a weapon in his possession and demanded my money. I said, “Hold on man, it’s in my sock.” So I reached down to my shoes with my left hand, then while he was watching all of that, I delivered my right hand across his jaw. Then when he was moving like a sine wave on the pavement, I took HIS wallet and went to Smokey Joes where I purchased ale for all my friends. You sees? You sees what you get when you mess with $$$MR. MARKET$$$. So it’s kind of like stealing, but it really isn’t.
The good news is that there will be another $$$MR. MARKET$$$ winner forthcoming, but first you must publicly declare, in my forum, just who is the greatest stock picker on the planet.
I am HUGE!!!
$$$MR. MARKET$$$
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12-31-2004, 12:28 AM
mrmarket
Administrator
CMN ==> The Christmas Winner!
It's christmastime. You wake up in the morning and you can’t tell how cold it is until you go outside. You can't tell how deep a puddle is until you step into it. You can't tell which way the train went by looking at the track. You can always tell a Harvard man, but you can’t tell him much. How about when you go to your doctor and he sticks an endoscope up your ass so he can tell your colon to “say cheese”? How do you know that someone didn’t put that endoscope in his mouth before it went into your ass? Do you know where that endoscope has been?? Well…you can’t tell.
There is so much in life that you just can’t tell. Busy operating, examination and emergency rooms must endlessly disinfect their medical devices. It's a dull but critical task. Any slip-ups give germs a chance to spread. Automating the procedure could reduce that chance. That’s why it makes so much sense to invest in a company that Cantel.
Today I bought Cantel Medical (CMN) at 37.61. I will sell it in 4 to 6 weeks at 43.49. Here’s why I like Cantel.
Cantel Medical Corp. is a leading provider of infection prevention and control products and services. They specialize in the following segments of the infection prevention and control market:
• Medical device reprocessing systems and sterilants/disinfectants for renal dialysis and endoscopy
• Diagnostic imaging and therapeutic medical equipment principally focused on endoscopy
• Hollow fiber membrane filtration and separation technologies for medical and non-medical applications
• Water treatment equipment and services for medical, pharmaceutical, and other diverse applications
• Scientific instrumentation
• Specialized packaging for the safe transport of infectious and biological specimens
Cantel has four wholly-owned operating subsidiaries :
• Minntech Corp (engaged in the development, manufacturing and marketing of disinfection/reprocessing systems and other products for renal dialysis as well as filtration and separation products for medical and non-medical applications.)
• Carsen Group Inc., its Canadian subsidiary, Carsen Group Inc., Cantel markets and distributes medical equipment (including flexible and rigid endoscopes), precision instruments (including microscopes and high-performance image analysis hardware and software) and industrial equipment (including remote visual inspection devices).
• Mar Cor Services, Inc., , based in Skippack, PA and founded in 1971, provides water treatment equipment design, project management, installation, maintenance, service deionization, and mixing systems to the medical community. Mar Cor also offers high purity water systems to the research and pharmaceutical industries. Mar Cor operates in 12 cities in the U.S. with three resin regeneration plants strategically located in Skippack, PA, Chicago, IL, and Atlanta, GA. When I was in graduate school, I told Mark Irwin that I would play golf with him at 7 am on Friday morning. The Thursday night prior, I was out drinking til 6:30 am. Then Mark Irwin showed up at my door and told me we had to go golfing. We went to play at a course in Skippack, PA…called Skippack. I smelled like gasoline.
• Saf-T-Pak Inc. Saf-T-Pak Inc., is a niche company providing products and training services for the safe transportation of infectious and biological specimens such as human and animal blood, tissue samples, vaccines, etc. Ewwwwwwww! Mr. Arthur Rutledge, President of Saf-T-Pak commented, "There are an estimated one billion specimens shipped annually in the United States alone. The U.S. Department of Transportation recently issued new regulations that broadened the class of specimens required to conform to strict packaging standards. Given the rise in international shipments of test samples for AIDS, SARS, Mad Cow Disease, Asian Bird Flu and numerous other maladies, this regulatory impact presents a considerable increase in the need for Saf-T-Pak's unique, patented, and secure packaging systems. It is exactly due to this anticipated rise in demand that we are excited about joining forces with Cantel who will aid immeasurably in helping us expand our business." Imagine getting in a car accident with a truck carrying this stuff? Ewwwwwwwwwww! Probably no worse than some of the bars I used to go to when I was in my 20’s. Do you know what kind of AIDS and Herpes are in those joints? Are those beers done yet?? Actually, growth prospects for Saf-T-Pak are strong because safety standards for shipping such materials are high, with many U.S. and international agencies enforcing the rules.
• The company's fifth operating company, Biolab Equipment Ltd., is a wholly-owned subsidiary of Carsen. The Biolab Group, founded in 1969, specializes in "ultra-pure water" for the medical, pharmaceutical, biotechnology, research and semiconductor industries. With operations in Oakville, Ontario, Dorval, Quebec, and Skippack, Pa, Biolab provides a wide range of high-performance products from simple point of use service deionization systems up to turnkey, large-volume complex Pharmaceutical/Biotech systems.
Cantel has demonstrated that is has premier customer service and quality products such that it has been able to grow its business through market penetration. The company’s principal end-markets are US dialysis treatment centers and Canadian hospitals. Approximately 61% of sales are derived from the US; 31% from Canada; and 8% from Europe, Asia and Latin America. Also management has been open about its intention to grow through acquisition and build a larger company while remaining a leader in niche markets. Minntech markets its products in the United States through a direct sales force and through distributors. Minntech B.V., Minntech's Netherlands subsidiary, is the base for its European operations. Minntech Japan K.K., Minntech's Japan subsidiary, and Minntech Singapore, a branch office of Minntech B.V., serve the Asia/Pacific market.
MediVators sells its endoscope reprocessing products in the United States under an exclusive distribution agreement with Olympus, and internationally through various foreign distributors.
Carsen markets its products for each business segment through separate, direct sales forces comprised of its own employees.
Most of the Company's direct sales forces are compensated on a salary and commission basis.
I almost forgot about the endoscopes. What is it with these endoscopes anyway? I know it’s important for medical science, but what if you were the guy who invented these things? You’d be at a Little League game and someone would ask what it is you did for a living, and you’d have to say that you invented a camera that can look inside someone’s ass. Huh?? He should have invented some device that would enable you to go to the bathroom on Saturday morning without having to get out of bed. Now THAT would have been a good invention. Sorry, I just don’t know about a camera that goes up someone’s ass. Actually, an endoscope is a device comprised of an optical imaging system incorporated in a flexible or rigid tube that can be inserted inside a patient's body through a natural opening or through a small incision. Endoscopy, the use of endoscopes in medical procedures, is a valuable aid in the diagnosis and treatment of various disorders. Endoscopy enables physicians to study and digitally capture an image of certain organs and body tissue and, if necessary, to perform a biopsy (removal of a small piece of tissue for microscopic analysis). I actually had one of those things done to me, but he went down my throat instead of up my ass. Still, they gave me excellent drugs and I had to skip work or I would have crashed my car on the way in.
A flexible video endoscope consists of a high resolution solid state image sensor contained in a flexible tube, which can be inserted into irregularly shaped organs of a patient's body, such as the large intestine. The control body of a flexible endoscope incorporates a steering mechanism and contains working channels and is connected to an external light source and processor, which permits a physician to view inside a patient's body. The working tip of a flexible endoscope contains a lens and a solid state image sensor and, in most cases, depending on the application, an outlet for air and water. Most flexible endoscopes also have internal working channels which enable accessories such as biopsy forceps to be passed to the tip. The solid state image sensor enables a live image to be transmitted electronically to a monitor, which image can be viewed by a physician and nurse as a medical procedure is being performed. "Nurse, come look at this! I've never seen such a turd before!!" The flexible video endoscope and its related accessories comprise the majority of Carsen's flexible endoscopy sales. I wonder if this video is more interesting than the Paris Hilton video in the medical community?
Minntech's renal dialysis treatment products include a line of acid and bicarbonate concentrates used by kidney dialysis centers to prepare dialysate, a chemical solution that draws waste products from the patient's blood through a dialyzer membrane during the hemodialysis treatment. Cantel provides the industry's most complete line of these concentrates in both liquid and powder form for use in virtually all types of kidney dialysis machines.
In response to government-mandated cost containment measures, in the late 1970s many United States dialysis centers began cleaning, disinfecting, and reusing dialyzers (artificial kidneys) in a process known as "dialyzer reuse" instead of discarding them after a single use. Approximately 80% of U.S. dialysis centers employ multiple-use dialyzers. Dialyzer reuse is also widely practiced throughout most of Eastern Europe, the Middle East, Africa and the Asia/Pacific regions. Sales of reprocessing products have continued to grow in these markets. In order to further improve support of its Asia/Pacific distributors, Minntech maintains an Asia/Pacific representative office in Singapore.
The growth of dialyzer reuse in Western Europe has been limited. However, due to pending changes to the reimbursement system in several key markets, such as Germany, this situation should improve. Minntech's dialyzer reprocessing products include the Renatron(R)II Automated Dialyzer Reprocessing System, the Renalog(R)III Data Management System and, the RenaClear(TM) Dialyzer Cleaning System, together with Renalin(R) Cold Sterilant and Renalin(R)100, both peracetic acid based sterilants that replace less environmentally friendly high-level disinfectants such as formaldehyde. Actril(R) Ready To Use Cold Sterilant, primarily used as a dialysis machine disinfectant, and Minncare(R) Cold Sterilant, utilized for water line disinfection, are also part of Minntech's liquid chemical germicide product line.
The Renatron(R) reprocessing system, first introduced in 1982, provides an automated method of rinsing, cleaning, sterilizing, and testing dialyzers for multiple use. The Renatron(R)II, the most current version of the product introduced in 1990, includes a bar-code reader, computer, and Renalog(R)III software system that provides dialysis centers with automated record keeping and data analysis capabilities. The Renatron(R) system is faster, easier to use, and more efficient than competitive automated systems. The Renatron(R) system is one of the top selling automated dialyzer reprocessing systems in the world.
In May 2001 Minntech introduced the Renaclear(TM) Dialyzer Cleaning System, the first dedicated automated dialyzer cleaning system. The system removes blood and organic debris from difficult-to-clean dialyzers before reprocessing, a process known as "precleaning." Precleaning is common in dialysis units because the practice can help extend the useful clinical life of a dialyzer. When dialyzers are precleaned by hand, many dialysis facilities remove the dialyzer header caps (the end caps of a dialyzer) to more effectively rinse out heavy blood debris. However, opening the dialyzer in this fashion can increase the risk of contamination of the dialyzer components and damage to the membrane. The Renaclear(TM) system features a high-powered fluid injector that cleans dialyzer headers (the two internal ends of a dialyzer) without requiring removal of the header caps. The Renaclear(TM) Dialyzer Cleaning System is designed for use with peracetic acid-based Renaclear(TM) Disinfectant. It's like when I was a bartender at Doc Watsons. Instead of just taking the empty mugs off of tables and pouring beer back in them, I used to throw them in the sink and pour water on them before I put the beer back in them.
Two of Minntech's competitors (Fresenius Medical Care AG ("Fresenius") and HDC Medical, Inc.) have introduced peracetic acid-based dialyzer reprocessing germicides, entering a market previously dominated by Minntech's Renalin(R) Cold Sterilant product. However, Renalin(R) remains the only reprocessing chemical that has been validated for use with the Renatron(R) dialyzer reprocessing system and cleared for marketing as such under section 510(k) of the Federal Food, Drug and Cosmetic Act. Renalin(R) is also the only dialyzer reprocessing germicide that carries a sterilization claim in the United States market. Minntech has informed its Renatron(R) customers that it is unable to guarantee the integrity, reliability, and chemical interaction of alternative germicides with the Renatron(R) system. Minntech believes that this validation, coupled with Minntech's extensive dialyzer reprocessing education, administration, and technical support services, are strong competitive advantages for its product.
Within the dialysis industry manufacturers have been acquiring chains of dialysis treatment centers over the past several years. These manufacturers have a built-in customer base for their products. However, Minntech views its manufacturer-only status as a competitive market advantage. Minntech believes that many dialysis treatment providers do not want to purchase hemodialysis supplies from manufacturers who also provide dialysis service and are, in effect, their competitors.
Two of the Company's competitors (Gambro Healthcare, Inc. and Fresenius) have made public disclosures of their intent to increase the use of single-use dialyzers which, at some dialysis centers owned by these companies, could impact Minntech's Renatron reprocessing equipment at such centers. Presently, the utilization of single use dialyzers continues to be significantly more expensive than dialyzer reuse and, as such, the number of Minntech-supplied reuse programs is not expected to decrease significantly.
Cantel holds a dominant position in the US market for dialyzer reprocessing systems, and it ranks third in the market for dialysate. While dialysis will probably not grow significantly, it is a core non-cyclical business and will be a springboard, via Cantel’s existing channels of distribution , for growth in other products that may become available through acquisition. In August 2003, Cantel acquired two water treatment companies for about $16 million (plus up to $3 million depending on performance), bringing in-house the capability to design, manufacture, market and service water treatment systems. The business is still small ($20 million in annual sales) and normalized gross margins are expected to be lower than Cantel’s other businesses (30% versus 38%), but it provides a platform for future growth and a critical product to sell to dialysis customers, which must have a reliable source of purified water. It also extends Cantel’s potential customer base to include non-medical industries that require clean water in their manufacturing processes, and is expected to produce recurring revenues for the Filtration and Product Service segments. The company’s low leverage and strong cash flow provide it with the flexibility to finance a sizable transaction. Cantel’s debt/equity ratio is only 0.19, compared to the Industry Average 0.40.
Cantel’s balance sheet remains rock solid. As of January 31, 2004, the company had $10 million of cash and $44 million of net working capital. Outstanding debt of $26 million was just 1.4x LTM EBITDA and 25% of total capitalization, and capital expenditure requirements have historically been a modest 1.0%-1.5% of sales. For the 12 months ended January 31, 2004, EBITDA was over $18 million and the company generated $16 million of Free Cash Flow. Lastly, just $2 million was drawn under two revolving credit facilities that provide up to $24 million of availability, providing significant additional borrowing capacity. Towards the end of this year, CMN nearly doubled their cash position from where it was at the end of January 2004.
CMN has enjoyed strong price appreciation over the past year (stock up over 130%) and is currently trading close to its 52-week high. Very very pretty:
The acquisition of the water treatment business has had a positive impact on the stock. Despite the recent appreciation, investors are rewarded by a conservatively-managed company that holds leading positions in attractive niche markets and has several new identifiable sources of growth. The growth story has come from CMN selling more and more consumables vs. durable goods. When people think about HP, they know they sell inkjet printers, but the big buckaroos come from selling the ink cartridges, CMN’s strategy is no different. Their cleaning products should boost margins and lead to more repeat business. It's the only chemistry compatible with nearly all endoscopes, which are fragile and prone to damage from similar products on the market. Would you want a broken endoscope inserted into your anus?
Cantel also makes automated systems that clean, or reprocess, endoscopes. There's room to grow that business because half of all endoscopes are cleaned manually. Manual cleaning isn't as effective, so there's more chance of infection. It's also a dirty job. Workers are exposed to disinfectant fumes and residue. As a result, the hospital workers prefer the Cantel products. Sterilization has a lot of room for a lot of growth. Although endoscopes generally can be manually cleaned and disinfected, there are many problems associated with such methods including the lack of uniform cleaning procedures, personnel exposure to disinfectant fumes and disinfectant residue levels in the endoscope. Cantel believes its disinfection equipment offers several advantages over manual immersion in disinfectants. The disinfectors are designed to pump disinfectant through all working channels of the endoscope, thus exposing all areas of the endoscope to the disinfectant, resulting in more thorough and consistent disinfection. The level of disinfection to be achieved depends upon many factors, principally contact time, temperature, type and concentration of the active ingredients of the chemical disinfectant and the nature of the microbial contamination. This process can also inhibit the build up of residue in the working channels. In addition, the entire disinfection process can be completed with minimal participation by the operator, freeing the operator for other tasks, reducing the exposure of personnel to the chemicals used in the disinfection process and reducing the risk of infectious diseases. The disinfectors also reduce the risks associated with inconsistent manual disinfecting. This disinfection contact time is currently the fastest available on any disinfectant product sold in the United States. So if you have to go to the hospital, make sure you ask if they manually clean their endoscopes or if they have Cantel equipment that cleans them. If they manually clean them, then the employees are going to be all goofy and unhappy from the fumes. Not good for your chances in the hospital going forward.
The core of Carsen was a distribution agreement with Olympus Optical Co. Ltd. Cantel has a customer sharing agreement with Olympus Camera. This is a different company than the one that operates Olympic Gardens in Las Vegas. Initially, Cantel sold Olympus products in Canada, where most of its endoscope product demand still comes from. Such sales make up about 45% of revenue today. Before buying Minntech, 75% of sales came from Canada.
Minntech sells 80% of its dialysis products in the U.S. Olympus makes 75% of all endoscopes in use today and remains an important Cantel customer.
Cantel is a Titan in the medical industry. Just like when $$$MR. MARKET$$$ walks into the gym and the other weight lifters scatter like rats, Cantel does the same to its competition. The Company believes that the world-wide reputation for the quality and innovation of its products among consumers, the Company's reputation for providing quality product service, particularly with respect to endoscopy and surgical and endoscope reprocessing products, the numerous customer contacts developed during its lengthy service as a distributor of Olympus products and the distribution arrangement for certain MediVators endoscope reprocessing products with Olympus, give the Company a competitive advantage with respect to certain of its products.
The fundamental story sounds great. So where’s the beef? CANTEL MEDICAL CORP. reported net income of $3,107,000, an increase of 73%, or $0.29 per diluted share, on sales of $45,342,000, an increase of 23%, for its first quarter ended October 31, 2004, as compared with net income of $1,795,000, or $0.18 per diluted share, on sales of $36,849,000 for the quarter ended October 31, 2003. Of the 23% increase in net sales, 20% was from the Company's core businesses and 3% was from the Saf-T-Pak acquisition in June 2004.
CMN banked $170 million in revenue in 2004 and had EPS of $1.05. For fiscal 2005, sales will increase 25% to $213 million due to geographic expansion in the Water Treatment segment, which is currently concentrated in the Northeastern US, the additional products that will be distributed to dialysis customers along with the revenues from the recent acquisition. The Company believes that it has the opportunity to continue increasing its marketshare in the endoscope reprocessing segment. The majority of its product service segment is located in Canada where the Company's marketshare in its flexible endoscope service business is substantial; therefore, growth opportunities for its existing service business may be limited without the addition of new product servicing opportunities.
Their 5 year goal is to be a $500 million dollar company. A number of positive developments have improved the company’s future growth prospects, including the recent entry into the water treatment business, a stronger Canadian healthcare market, and the introduction of an updated Endoscope Reprocessor in Europe. There is no single company that is directly comparable to Cantel because of the many business segments in which the company operates. Most of Cantel’s competitors are divisions of much larger public companies or are private, resulting in a limited public company peer group. This will translate to EPS of $1.43 per share in fiscal 2005. If you take these earnings and multiply it by today’s PE ratio of 32, you get a stock price of 45.76 which is well past my selling target. In fact, CMN trades below the industry valuation of 40, which would mean that its share price could go as high as $57, through PE expansion.
Actually, the demographics favor this growth. People are living longer and, as a result, require more medical care. I have not seen anything that will reverse this trend, other than extreme sports. About 2 million people get infections each year in U.S. medical facilities. Around 75,000 die from the infections. U.S. hospitals spend $4 billion a year treating infections. Insurance costs exceed $5 billion. That's money that can be plowed back into Cantel's products, with no net drain on expenses to patients or hospitals.
The depth and experience of Cantel’s management team puts the company in a strong position to pursue its long-term growth objectives. Many of the company’s senior executives and board members have a long history with Cantel, and directors and officers have a significant financial stake in the company, together owning 30% of fully diluted shares. The company’s largest shareholder is its Chairman, Charles Diker, who owns 23% of the stock either directly or through family members and affiliates. James Reilly has been CEO for 15 years, and comes across as a strong, disciplined leader who has surrounded himself with very experienced executives. The reason for this is CMN’s awesome employment termination plan which I list below:
4. TERMINATION OF EMPLOYMENT. The provisions of Section 1 of this Agreement notwithstanding, this Agreement and Employee's employment hereunder may be terminated in the manner and for the causes hereinafter set forth, in which event the Company shall be under no further obligation to Employee other than as specifically provided herein:
4.1 If Employee is absent from work or otherwise substantially unable to assume his normal duties for a period of sixty (60) successive days or an aggregate of ninety (90) business days during any consecutive twelve-month period during the Employment Period because of physical or mental disability, accident, illness, or any other cause other than vacation or approved leave of absence, the Company may thereupon, or any time thereafter will such absence or disability still exists, terminate the employment of Employee hereunder upon ten (10) days' written notice to Employee.
4.2 In the event of the death of Employee, this Agreement shall immediately terminate on the date thereof.
So what the company is telling you, is that if you are dead, they will fire you. That means employees have big incentives to work harder. The boss is not dead, and here’s what he has to say about his company:
Mr. James P. Reilly, President and Chief Executive Officer of
Cantel, commented, "Increased sales and generally improved gross
margins of our core business segments contributed to the outstanding
operating results for our first quarter ended October 31, 2004."
Reilly added, "With the first quarter results as a base and the
anticipated improvement from our restructured water treatment and
filtration group, we expect continued strong operating results for the
balance of fiscal 2005." Reilly further added, "We are continuing to
aggressively search for acquisitions of companies providing products
and services in the infection prevention and control markets." If you don’t believe him, you can call him. This is his phone number: 973-890-7220.
Actually what makes Reilly a great boss is the company’s car plan:
3.5 USE OF AUTOMOBILE. During the Employment Period, Employee shall be entitled to the use of an automobile leased or owned by the Company in connection with the Company's business. The make and model of the automobile shall be reasonably satisfactory to Employee, provided that the Company's monthly payments in respect thereof (exclusive of the expenses referred to in the following sentence) shall not exceed $700. In lieu of the foregoing, the Company may pay Employee an automobile allowance of $700 a month. Employee shall be entitled to receive reimbursement for reasonable out-of-pocket expenses, including, without limitation, cost of gas, oil, insurance and other costs incurred by Employee in operating and maintaining the automobile; provided, however, that Employee shall be responsible for keeping appropriate records regarding the use of said automobile, as instructed by the Company or its accountants.
The industrial technology equipment distributed by Carsen, Cantel’s subsidiary, is generally purchased by large industrial companies including the oil and gas industry. I believe that after the Orange Bowl, Carsen’s endoscopes may be used on the Titans, and they will find a large volume of oil and gas.
$$$MR. MARKET$$$
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I am HUGE! Bring me your finest meats and cheeses.
- $$$MR. MARKET$$$
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