Atrion Corporation
Atrion is a medical device and components manufacturer focusing on the fluid delivery, cardiovascular, and ophthalmology markets. They are headquartered in Texas with manufacturing facilities in Texas, Alabama, and Florida.
Product Lines
Cardiovascular Products
Atrion’s main products include technology that allows essential fluids and medications to be delivered to the heart during open heart surgery. These allow surgeons the flexibility to deliver the necessary fluids to the patient.
Atrion also manufactures a myriad of other products such as relief valves, aortic punches, and other products used in minimally invasive surgeries.
Fluid Delivery Products
Atrion manufactures a wide variety of one-way valves used for fluid delivery for drug delivery, catheterization, and other medical uses.
They are also a leading manufacturer of fluid delivery tubing and medical tubing clamps used in complex therapy procedures such as anesthesia, intravenous feeding, and cancer therapy.
Ophthalmic Products
Atrion is a leading manufacturer of soft contact lenses cases. They also have a proprietary market leading balloon catheter, which has been approved by the FDA, used to treat blockages of the tear duct.
Marine & Aviation Components
Atrion also has a non-medical division that manufactures inflation systems used in the marine and aviation industries.
Examples include inflation devices, oral inflation tubes, valves, and closures for life vests, life boats, survival equipment, and many other uses.
Revenue Breakdown by Product Line
Product Line 2011 Sales(m) 2011 % Sales
Fluid Delivery $45,274 38.5%
Cardiovascular $34,072 28.9%
Ophthalmic $19,581 16.6%
Marine & Aviation $18,777 16.0%
Balance Sheet
Atrion has a rock solid balance sheet. The company has zero debt. Atrion also had $44.9 million dollars of cash at the end of December, 2011 which is an increase from $21.4 at the end of 2010.
Since the onset of the financial crisis in 2007-2008, a healthy balance sheet is even more important today. Even now in early 2012, while the economy seems to be improving and the market is rising, we are still dealing with high unemployment. A company with no debt is well prepared to weather any downturn in the economy or future financial calamity.
In the small-cap investing world it is even more important. Many small companies are highly levered as they are in the growth stage of their life cycle. Atrion is solid and steady.
Growth
While Atrion isn’t a high flying technology company that is growing 30% a year, it isn’t a stodgy beaten down name either.
Atrion has steadily grown revenues about 10% per year since 2006. This is very comforting given that we have seen one of the worst recessions since the Great Depression. Even at the peak of the financial crisis, Atrion grew revenues 8.3% in 2008 and 5.0% in 2009.
This is an impressive feat and gives you confidence that the company will only accelerate their revenue growth over the next few years as the economy improves. We saw revenue growth start to accelerate again in 2010 with a 7.9% increase followed by another 8.4% increase during 2011.
Atrion Revenue Growth
Year Revenue
2005 $ 72,089
2006 $ 81,020
2007 $ 88,540
2008 $ 95,895
2009 $100,643
2010 $108,569
2011 $117,704
Earnings, Earnings, Earnings
At the end of the day it is all about earnings. This is where Atrion shines. From 2005 to 2011, Atrion has increased it’s earnings per share from $4.66 to $12.82. This is a 175% increase in just seven years.
This is pretty impressive growth. The company has been able to scale their business and bring in an increasing amount of variable margin. While sales have increased 63%, in the same period earnings increased 175%.
This is happening because of expanding their sales over their fixed cost base as evidenced by their gross profit margins expanding from 40% to 51% during this time frame. This also shows good cost containment and management of expenditures by management.
Atrion Earnings Growth Atrion Operating Margin Growth
Year EPS Year Margins
2005 $4.66 2005 40.2%
2006 $5.51 2006 40.0%
2007 $7.06 2007 42.7%
2008 $7.82 2008 44.4%
2009 $8.36 2009 45.0%
2010 $10.32 2010 46.9%
2011 $12.82 2011 51.0%
Dividends
Companies that pay dividends often times out-perform the market. Historically dividend returns have made up a good chuck of the market’s return. While you like to see a company reinvest earnings to grow future earnings, it is also a good sign when they are confident enough about their business that they return money to shareholders via dividends.
Atrion has a solid history of paying dividends. As you would expect, since the company is still growing, it isn’t a high yielding stock, however, it does pay a nice dividend. The dividend has increased from $0.62 per share in 2005 to $1.82 per share in 2011. This is a 193% increase in seven years.
This is nice to see as an investor. The dividend has been increasing at larger rates in the past couple years. I would expect this trend to continue as earnings accelerate out of the recession.
Management has also shown in 2010 that they have the propensity to return cash to shareholders above and bey
ond the normal dividend. Twice during 2010, the board declared a special on-time dividend to shareholders. In January 2010 Atrion paid a special $6.00 dividend and then another in December 2010 of $3.00 per share. I would continue to expect to see further special dividends if the company does not have any large capital expenditures to fund.
These future dividends will enhance Atrion’s return going forward.
Management
The management team at Atrion is solid. Emile Battat just recently stepped down from running the day to day operations but remains as Chairman of the Board of Directors.
The reigns of the company were passed to his son, David Battat who is the current President & COO. While a red flag usually goes up when you see things passed on in the family, you have to have confidence in the independence of the Board of Directors that it is in the best interests of shareholders.
David has been with the company through the terrific increase in revenues and expansion of earnings, margins, and dividends. While a small risk, it appears that he is well qualified for the position.
Emile Battat owns 10.3% of the shares outstanding. You like to see management with skin in the game and with a large stake like that, the Board of Directors will act to enhance the value of the stock for all shareholders because they will benefit right along with you.
Conclusion
Based on a conservative assumption of 10% revenue growth, margins of 50%, and a P/E ratio of 19, I can see ATRI getting to $390 per share in five years. Add in approximately another $10-$12 in regular dividends and the possibility of special dividends, the total return could approach the equivalent of $425 per share.
Even if we have another recession and these targets are not met, it is hard to see how ATRI doesn’t get to at least $300 per share plus dividends over the next five years. I truly believe the downside is extremely limited over a five year time horizon.
Opportunity
In a previous article I quoted Arne Alsin who always says that there are two types of companies: Those that have problems and those that are going to have problems. Atrion had this moment in their 4th quarter earnings release in February.
They noted that a major customer in their ophthalmic division determined that they had a significant inventory problem and needs to work down their inventory. They had been building safety stock in order to ensure customer deliveries and notified Atrion that they now need to work down this inventory during 2012.
Due to this Atrion expects that income could decline around 10% for the year 2012 with most of the effect happening in the first two quarters of the year. To quote:
“While this would mean an interruption of our 13 year history of annual growth in EPS, we wish to emphasize that we believe our business has never been as solidly anchored as it is now and we expect a return to our double-digit growth pattern in 2013.”
This customer is in a part of the business that is only around 16% of the business. The fluid delivery and cardiovascular divisions are still growing nicely. This looks to be a one-off occurrence of uneven sales to one customer.
The stock got knocked down from over $250 per share down to a little below $210. It is currently trading at $209 per share.
I would initiate about a 25% position in ATRI here. I would add again around $195. It can be a thinly traded stock at times and I have seen it move $5 – $10 over a couple of days. If you get the opportunity to purchase the stock around $175 per share, I would back up the truck.
Since management has told you that the first two quarters will be the worst as far as the earnings declines are concerned, I would use these next several months to keep ATRI on your radar screen and see if you can pick it up on the cheap.
FULL DISCLOSURE: I am long ATRI and have been for years. It is my largest position. I plan on holding ATRI for many years.
