Rising interest rates and fears of a global recession spooked investors, crushing many growth stocks in 2022. The sell-off helped lower the Nasdaq Composite roughly 30% so far this year.
But not all growth stocks fared as poorly as those that dominate the tech-heavy index. Shares of medical device maker LeMaitre Vascular (LMAT) are down just 12% so far in 2022. The company was helped by the continued strong demand for medical devices even as the economy started slowing.
Does that make LeMaitre Vascular’s stock a buy for dividend growth investors? Let’s drill down into the company’s fundamentals and valuation to try to answer this question.
Admirable top-line growth in the third quarter
Founded in 1983, LeMaitre Vascular is a small-cap company with a roughly $1 billion market capitalization. LeMaitre’s founder and former CEO, George D. LeMaitre, was a vascular surgeon. Working with an engineer, Dr. LeMaitre was able to provide insight into how to design devices that would be useful to vascular surgeons in improving patient outcomes. Staying true to its mission of launching innovative products, the company sells directly to hospitals in 25 countries and via distributors in 70 countries around the world. Its products include catheters and angioscopes.
LeMaitre recorded $39 million in net sales during its third quarter, a 1.7% increase year over year. It was hampered somewhat in this latest quarter by tough foreign currency conversion rates. Factoring this out, LeMaitre’s organic net sales grew by 7% year over year in Q3.
These solid results were driven by double-digit year-over-year growth in the net sales of its carotid shunts (23% growth), vascular grafts via its Artegraft brand (12%), allografts (10%), and embolectomy catheters (10%) in the third quarter.
LeMaitre generated $0.25 in diluted earnings per share (EPS) during the quarter, which was a 16.7% year-over-year drop. The company’s double-digit percentage growth in employee headcount led to a 19.8% growth rate in operating expenses. Coupled with the unfavorable foreign currency translation that weighed on net sales, this explains how LeMaitre’s net margin fell 300 basis points year over year to 14% for the quarter. Along with a 1.3% increase in the outstanding share count to 22.2 million shares, this is why adjusted diluted EPS growth lagged well behind net sales growth in the third quarter.
As the uncharacteristic strength of the U.S. dollar fades and LeMaitre fetches a return on its increased employee headcount, profitability should rebound. This is why I am confident that the company will produce a much higher diluted EPS growth rate than the analyst forecast of 2.6% annually over the next five years. That’s just a fraction of the 17.9% annual diluted EPS growth rate logged in the prior five-year period, which is very conservative for a company steadily producing high-single-digit organic net sales growth.
Healthy dividend growth can be maintained
Since implementing a dividend in 2013, LeMaitre has never failed to deliver double-digit percentage dividend growth in a given year. And the company appears positioned to build on this feat in the years ahead.
LeMaitre’s dividend payout ratio will be just below 48% in 2022. This is a payout ratio that gives the company the flexibility to execute bolt-on acquisitions and repurchase shares moving forward. That’s why I anticipate that the dividend could grow slightly faster than earnings over the next few years.
LeMaitre’s 1.1% dividend yield isn’t mind-blowing when stacked against the S&P 500 index’s 1.7% yield. But its growth potential arguably compensates for the lower starting yield.
A reasonable valuation
LeMaitre is a quality business. And the stock’s valuation doesn’t seem out of line, either.
LeMaitre’s dividend yield of 1% is in line with its median rate since the company started offering a dividend. Since its fundamentals seem to remain intact, the current $45 share price makes the stock a buy for dividend growth investors.
Simply put, LeMaitre is a lesser-known player in a gigantic peripheral vascular disease devices market. The company is putting more of its free cash toward growing the company at the moment with the expectation that it will eventually reach a point where it can direct more toward a dividend. As the global geriatric patient population rises, demand for peripheral vascular disease devices also will. This is why the market research firm, Markets and Markets, expects the global peripheral vascular disease devices market will compound at 5.3% annually from $10.3 billion in 2021 to reach $13.4 billion by 2026.
With approximately 2% market share in a thriving market, LeMaitre has plenty of room to expand through product launches and acquisitions. This should power market-beating appreciation in the stock price in the years to come. Buying now will allow long-term investors to benefit from the stock price appreciation until the dividend grows enough to create a more appealing dividend yield down the road.
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Source: The Motley Fool