Stockchase Insights TransMedics Group TMDX-Q BUY Oct 14, 2024

Transplant therapy is so vital to America that it transcends the earnings. Likes the story.

TMDX's flagship product is the Organ Care System Lung (OCS Lung) which can be used to treat patients with end-stage lung failure who are waiting for a lung transplant. It claims that its technology has advantages over the traditional method of placing organs on ice. There are risks of regulatory uncertainties, approvals, and competition from companies like FREY, MDT, CLSN, and others.

The company is a $2.4B stock, which is expected to be profitable over the next year or so, and its historical sales growth rate has been excellent. It has improved its profit margins, but trades at a high valuation of 7.7X forward sales. It does not generate positive free cash flow and has a small balance sheet. We think the name looks interesting, its business model is intriguing and there appears to be demand for the technology, however, its fundamentals could see further improvement. As a more speculative, high-risk play, we would be OK with the name, while considering small-cap risks, position sizing, and the volatility of the underlying industry.
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They last reported good quarter. He has some knowledge of the organ transplant sector from his charity work, and feels this company is doing well.

We quite like TMDX and believe it should do well over time. Its small size adds risk, but it seems to have a better mousetrap for organ transplant. Sales growth is very high and it was profitable last quarter. It has approval for several organs and will add more over time. Its solution allows for a better patient outcome. There are always complaints about costs, and the sector is a hot political potato. But we like what the company has accomplished so far and the quarter and guidance are solid. The market size is not huge, but big enough for the company, and 'probably' small enough to keep the big players from bothering. We would consider TMDX to be one of our better high risk ideas right now. 
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Certainly the stock is expensive on valuation. We have several reasons for liking it: 1) Execution has been excellent. TMDX has managed its growth very well and continually underestimates its growth 2) It thinks long term. Buying aircraft scared investors but it was absolutely the right move to expand its market. 3) We think it has a VERY strong moat, with FDA approval on multiple organs. It is a better solution and results in better patient outcomes. Organs in better shape means an expanded market (many transplants fail as organs only last so long with prior methods). 4) Profitability is now occurring on an adjusted basis, and will likely accelerate. 5) The market opportunity remains quite large, but is not likely big enough to attract giant, stronger competitors. 6) There is long term potential for new markets: i.e. keeping damaged organs alive outside the body for 'fixing' and then transplanting back into the original patient. This is a ways off but obviously would be huge if it can be done (no rejection issues etc.). 7) A private competitor Paragonix was recently acquired, and TMDX is much bigger and better (our belief). 8) Its momentum and larger market cap should attract more new investors to the story; it is still 'small' by healthcare company standards. Now, don't get us wrong: if growth were to slow substantially or there was some other 'problem' the stock would take a big hit, for sure. But we have been following it for a year and remain confident in its future. 
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It was certainly not a great quarter, but there is some explanations, and growth remains high nonetheless. EPS was 12c, estimate was 29c. Revenue was $108.8M, estimate $115M. Gross margin 56%, down from 61%, estimates 61.6%. R&D expenses increased to $14.3M from $11.1M. SG&A expenses were $42.7M vs $30.7M last year. We are OK with the R&D spend. 2024 guidance went to $425M+ revenue, vs consensus $445M, but long term goals were maintained. Part of the issue was plane maintenance. This likely hurt revenue while planes were grounded. Product mix hurt margins. We were aware of the plane issue and assumed the Street was as well, but it was a miss, and the stock is expensive. Investors had very high expectations. The after hours response does seem excessive, but there are still huge embedded profits here for most investors and it is an easy sell for short term holders. But we do not really see any long term change here. TMDX is still guiding for 76% to 84% growth and not many companies are in that league. We would be OK initiating a position into the decline. It *probably* should be down about 10% to 15% with this news, not 25%. Still, it should be considered an aggressive growth stock.
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