Vitrolife – profitable growth, but skyhigh valuation

In this post I will share my initial thoughts on Vitrolife and my investment thesis. I’m currently on the sideline due to the high valuation.

Vitrolife is an international medtech group that develops, produces and markets fertility treatment products as well as cell therapy and tissue engineering, organ transplantation systems, and products based on hyaluronic acid.

Vitrolife is listed on Nasdaq Stockholm Large Cap and the current market cap is around 18 billion SEK.

Megatrend: The company benefits from a societal trend of postponing childbearing, both in Western countries as well as Emerging countries.

Global market growth in the IVF area, measured in monetary terms, is estimated to 5-10% per annum. Growth is driven by the growing middle class, the fact that parents-to-be choose to try to have children later in life, greater social acceptance of IVF and increased use of technology in IVF treatments.

Dividend history:

Vitrolife has increased their dividends at a high rate the past couple of years, but the share price has also increased from very low levels which results in a dividend yield of only 0.5 %. On the other hand, I expect the dividend growth over the coming years to offset the low dividend yield today. I expect the dividend for the fiscal year 2019 to be 1 SEK (30% of EPS 3.3 SEK) resulting in a dividend yield of 0.63 % (increase of 17.6%). Key measures support the room for increasing dividends, but also allows the company to grow through organic growth and acquisitions.

  • Payout ratio: ~30%
  • Equity ratio: ~80 %
  • Negative Net debt / EBITDA

Valuation: Trades at EV / EBITDA of 36.4 and PE of 52 which is skyhigh, but the average return on equity the past five years is ~20%! But, given an reinvestment rate by the company of 70% and a return on equity of 20 % I believe that the company can defend this valuation.

TA: The stock is a sales candidate (downwards trend). 10 and 50 days MA has crossed 200 days MA and 100 days will soon also cross 200 MA. The stock has support around 160 SEK and 145 SEK. A break through 160 signals further decline.

A final remark is the possibility that William Demant A/S has increased their shareholdings in the company and now owns 22.6% of the company and rumour has it they are willing to make a bid on the entire company.