Invacare Rolls In Value

By Will Ashworth | February 17, 2010 AAA

Ohio-based Invacare (NYSE:IVC) is the world's number one manufacturer of wheelchairs, both powered and manual. Trading at 5.8 times operating cash, its stock appears ripe for the picking.

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Huge Increase In Free Cash
Invacare's fourth quarter numbers were decent, if not spectacular. Sales were up 4.2% to $448.6 million and adjusted earnings per share grew by 5% to $0.63. For the entire twelve months, sales fell by 3.6% to $1.69 billion while adjusted earnings per share grew by 17% to $1.58. CEO Malachi Mixon III commented, "despite a challenging reimbursement and economic environment, 2009 was a strong year for Invacare on all critical measures."

Free cash flow in 2009 jumped 136.4% to $141.6 million from $59.9 million a year earlier. Because of this, the company was able to pay down $157.2 million of its debt, lowering its debt to adjusted EBITDA ratio to 2.3 from 3.3.

Looking ahead to 2010, Invacare sees free cash flow between $65 million and $75 million. It's still good but closer to traditional levels. With the exception of 2002 when it generated just over $100 million in free cash flow, it's never been this high into triple digits. (Learn more about free cash flow in Analyze Cash Flow The Easy Way.)

Invacare And Peer Group

Company Market Cap Price/Cash Flow
Invacare (NYSE:IVC) $866.1M 5.8
Hill-Rom Holdings (NYSE:HRC) $1.6B 7.3
ResMed (NYSE:RMD) $4.2B 22.4
Mettler-Toledo International (NYSE:MTD) $3.2B 14.0
Kinetic Concepts (NYSE:KCI) $2.9B 6.6

Lower Valuation
Invacare's direct competitors, Sunrise Medical and Pride Mobility, are both privately owned so the table above is a group of peers from the medical equipment industry. Notice the current disparity in stock valuations within the industry based on cash flow. A more meaningful comparison is Invacare's 10-year historical price-to-cash flow ratio, which averages 11.5, double what it is today. Any way you slice it, at least based on cash flow, Invacare is undervalued. However, when compared with the S&P 500, its stock appears fairly valued. We'll need to dig deeper.

A Sign Of Life
Invacare's five-year average annual return is negative 10.6%, worse than both its industry and the S&P 500. Shareholders, including CEO Mixon, who owns 7.3% of its common stock and 63.4% of its 10-vote Class B stock, haven't had much to cheer about in recent years. The exception is 2009 when its stock rebounded from the low teens, rising 61%. Are there more gains on the horizon? If it delivers organic growth in 2010 as expected along with strong free cash flow, it should be able to reduce its debt further, enabling the company to make additional accretive acquisitions down the road.

The Bottom Line
In the last 11 years, Invacare's operating income has never dropped below $26 million and has risen above $121 million. However, something appears to be changing. In 2004 when it delivered a record $121 million in operating income, its free cash flow was $56.9 million. In 2010, it should generate approximately $75 million in operating income (approximately 60% of adjusted EBITDA) with $70 million in free cash flow. Invacare might not be perfect but it's doing a much better job managing its cash flow than in the past. On this point alone, its stock deserves a higher price-to-cash flow valuation. Eventually, investors will come around. (For more related information on health care stocks, see Investing In The Healthcare Sector.)

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