Leading supplier of medical devices to niche markets Atrion (Atrion Stock Quote, Chart, News NASDAQ:ATRI) has had it rough over 2020 with sales sliding during the COVID-19 pandemic, but the company is in great shape and investors should be taking notice.
So says portfolio manager Brett Girard of Liberty International Investment Management, who argues that the company’s free cash flow is its key selling point.
“We start with a very quantitative approach,” says Girard, speaking on BNN Bloomberg on Wednesday. “We have 7000 different companies from all over the world and we get the quarterly financial information that’s reported by these 7000 publicly traded companies, and we run 20 different quantitative screens. The first and the most important screen that we run is free cash flow growth.”
“If you're a company that can grow your free cash flow then you have the optionality and the ability to reinvest it back in business in such a way that the business can continue to grow,” Girard said. “And [Atrion] is a small company but it has a really strong free cash flow characteristics.”
Allen, Texas-based Atrion makes medical products for fields from cardiovascular and opthamology to fluid delivery including IV tubes. The company’s business was hit when elective surgeries were postponed due to COVID-19, as shown in its recent earnings.
Last month, Atrion reported second quarter revenues of $38.0 million compared to $40.1 million a year earlier with net income coming in at $8.6 million compared to $9.7 million for Q2/2019.
“The impact of the pandemic was felt in the second quarter with revenues and operating income lower by 5 per cent and 8 per cent, respectively, essentially the reverse image of the first quarter when revenues were up 5 per cent and operating income was up 6 per cent.” said president and CEO David Battat, in an August 6 press release. “The current year second quarter saw hospitals suspend elective surgeries to preserve ICU beds and other resources to deal with the anticipated deluge of Covid-19 patients. As a result, sales of our products used in elective procedures were lower by $3.7 million.”
But demand for Atrion’s products, which include some new entries to the market this year, could rise as surgeries get back online with the opening up of regulations. Girard said the company’s recent increase in its dividend is a good overall sign of the health of the company.
“With free cash flow there's really five different things that you can do: you can invest in R&D, you can go out and buy a company right — and Atrion has engaged in a lot of M&A over the last number of years. The third thing is you can pay down debt, the fourth thing is buy back shares and the fifth is pay a dividend,” Girard said.
“Atrion has been very, very strong and increasing their dividends over the last number of years,” Girard said. “We’ve seen five-year dividend growth rate of about 16 per cent and, in fact, they just increase their dividend by 13 per cent.”
“So, it’s a small company but it has a really strong free cash flow characteristics, and that’s something that’s persistent across all the companies in which we invest,” Girard said.