Posted on August 13, 2021 by Aaron Warwick
Yesterday, InfuSystem (INFU) released their 2Q results. The market was not impressed, giving shares up to as much as a 25% haircut, with shares down below the $15/share range for a large part of the day. Based on what I heard from multiple investors, there was disappointment that INFU missed analyst estimates, but even more so that management seemingly hinted on the Q1 call that they would beat and raise guidance in Q2. Instead, management not only missed estimates and held guidance, but indicated they would likely come in towards the lower end of that guidance. I was a buyer on this dip because I think the stock should have done the opposite: it should have been UP 25% on the day. Why?
To understand this situation, one need only review the company’s conference call transcript. On the call, management discussed multiple opportunities for the company to multiply their revenue and EPS. But to do that, the company needs to make short-term investments. These investments will lead to a slight decrease in the revenue they would have otherwise earned in 2021 (because they need to train salespeople). But more likely the reason for the drop in the share price, the company also lowered their EBITDA margin expectations (because they need to hire salespeople, creating a new expense, but the revenue from them will primarily be recognized in 2022 and beyond). In the long run, this pivot, which simply leverages the existing infrastructure and core competencies of the company, will likely prove to be a wise investment.
INFU’s management team indicated that at least three new areas of business they are entering could lead to revenue in EACH area that equals or exceeds the company’s current revenue from their oncology services (roughly $60M annually). Further, these new areas of focus will also be at high margins, likely in the 60% gross margin range. The company indicated on the call that it would take only 3-5 years to reach these levels. In short, the company temporarily, for a quarter or two, paused their trend of consistent growth in revenue and EBITDA/EBITDA margins in order to invest in opportunities that could materially transform the company into a billion dollar business.