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NuVasive, Inc.

NUVA: NASDAQ

NuVasive, Inc. develops and manufactures minimally-invasive spine surgery products. The company was founded in 1997 and revolutionized the industry five years later with the only lateral approach spine procedure supported by substantial clinical evidence and publications.[1] NuVasive has since diversified beyond spinal fusion to cover other areas of the spine market, including biologics, neuromonitoring and deformity.[2] The company still enjoys a dominant position in the lateral spine procedure industry and is the largest pure-play spine company in the world.[3]

Investment thesis

NuVasive first hit our screens when the stock came in about 20% after reporting its second quarter 2017 results. Revenue fell short of sell side expectations and growth slowed sequentially.[4] Further, the outlook only grew more uncertain as management noted a slowing spinal surgery market as well as pricing pressures and announced that the long-time CFO would be retiring.[5] Despite the stock coming in, we felt that it had further to go based on the valuation and outlook.

It turned out that we were right, as the stock continued to fall and plummeted another 25% after pre-releasing its fourth quarter 2017 results.[6] The company also provided its 2018 outlook, which called for mid-single digit revenue growth and at least 100 basis points of operating margin expansion.[7] At that point the valuation level appeared more favorable and we decided it was time to dig deeper.

Confirmation through research

Through our research and conversations, we realized that NuVasive was at what appeared to us a free cash flow inflection point. The company just finished building out a new manufacturing facility in Ohio and expanding its international sales and distribution platform.[8] We expect free cash flow and margins to benefit as the associated expenses fall off and NuVasive starts to recognize revenues from these investments. The international business is currently 20% of sales and management expects it to more than double over the next five years.[9] The U.S. spinal market has slowed, as mentioned, but we believe the exciting new technologies that NuVasive launched in 2017 should drive above market growth for the next few years. Further, we expect the U.S. spinal market to recover as it has cycled in the past and believe that the current valuation is missing the longer term opportunity.

Variant Perception

We see multiple ways to win in this investment, including margin expansion, new product launches, international growth, greater operational efficiency and an eventual comeback in the U.S. spinal market. We expect these tailwinds to increase free cash flow per share over the next few years and are optimistic that the improvements will drive upside in the stock.