Identifying tomorrow's stock market winners requires unwavering curiosity. Separating genius ideas from the crazy, filtering the doable from the impossible, and then evaluating financial feasibility is a lot of work. It's also a lot of fun and a bit of a numbers game.
Let's look at two companies that I think have the right stuff to produce explosive potential gains for the prescient investor.
Avita Medical turned a dream treatment into reality
Having innovated a technology platform to regenerate skin, Australia-based Avita Medical (AVMXY) has created an alternative to skin grafts that involves less time, pain, and risk of infection.
Avita invented a medical device called the RECELL system that prepares a spray-on suspension using a small amount of a patient's own skin. Wherever the spray has been applied, skin regenerates. This is a breakthrough in treating burns and skin trauma.
The RECELL device was the first product in more than 20 years to be granted pre-market approval by the Food and Drug Administration to treat severe thermal burns. The system was approved by the FDA in September 2018 and officially launched in January 2019.
By the end of June 2019, Avita had RECELL system orders from 39 of the 132 U.S. burn centers and had trained 136 burn surgeons. As of the third quarter 2020, a total of 69 burn center orders had come in, and 205 burn surgeons had been trained.
The company has focused almost all its resources on the U.S. market, and is in the process of relocating from Australia to Valencia, California. Avita Medical maintains that it is presently well capitalized and is moving entirely because virtually all its customers are in the U.S. market.
Strong third-quarter fiscal 2020 results were released April 29, with both revenue and procedural volume increasing 20%. The RECELL system was used in over 400 procedures in the quarter. Revenue was $3.9 million in the third quarter, compared with $3.2 million in the previous quarter.
In year-over-year comparisons, first-quarter 2020 revenue was $3.9 million, versus $1.6 million in the 2019 first quarter.
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Burn incidence during the COVID-19 pandemic hasn't changed a great deal, and use of the RECELL system continues to grow despite the health crisis. But the pandemic has forced hospitals and clinical research institutions to shift priorities, and as a result, Avita Medical's ongoing clinical studies in pediatric burns, soft tissue reconstruction, and vitiligo treatment have been paused.
Avita estimates the addressable market in pediatric burns to be $250 million; in soft tissue reconstruction to be $550 million; and in vitiligo, $600 million.
In my view, Avita is speculative, but considering the medical community's rapid adoption, and mounting evidence of success, it's the kind of speculative buy that I feel very comfortable with. Avita Medical is a good choice for investors comfortable with a medium degree of risk.
The biggest in hospice services, Chemed is in the sweet spot
Chemed (CHE 0.03%) operates two profitable businesses that have absolutely nothing in common: Roto-Rooter, the largest provider of plumbing and drain-cleaning services in North America; and VITAS Healthcare, the largest U.S. provider of hospice services for patients in the end stage of life.
On April 28, Chemed released first-quarter 2020 earnings, and both parts of the company are successful. The gains are very solid, and ongoing business is unlikely to be derailed by coronavirus troubles.
On the VITAS side, net patient revenue was $338 million, an increase of 10.1% year over year. Net income jumped to $42.5 million, an increase of 22.7% versus the prior-year period, and adjusted EBITDA was $60.2 million, an increase of 21.2%.
For Roto-Rooter, revenue increased 14.6% to $178 million, and net income increased 14.3% to $26.7 million, compared with the same quarter a year ago. Adjusted EBITDA went up 19.5% to $40 million.
In 2007, Chemed restarted its share repurchase program. With $254 million of authorization available, the company plans to continue share repurchases in the coming quarter.
Management is planning to provide 2020 earnings guidance in July when the influence of the COVID-19 health crisis will hopefully have eased and business visibility is better.
Chemed operates an unlikely combination of businesses, but it's impossible to argue with success. The company is acquiring and operating more Roto-Rooter franchises, and in the VITAS space is buying small community hospices. Streamlining operations and increasing market share continue to drive both top- and bottom-line growth.
I think the VITAS business is the side of Chemed that will see explosive growth, while Roto-Rooter will play an important but supporting role.
According to the nonprofit Population Reference Bureau, the U.S. population aged 65 and above is expected to reach 95 million by 2060, from 52 million in 2018. High prevalence of cancer; dementia; and respiratory, cardiovascular, and kidney disease among this population will drive growth for VITAS.
Chemed's hospice business is positioned incredibly well. Demand will only continue to rise, and VITAS, as the largest U.S. provider of hospice services, has the experience and economies of scale to be a blockbuster brand.
Whether it decides to divest itself of Roto-Rooter at some point or keep it, I think Chemed will produce outsize returns for investors who choose to hop on board now, thanks to long-term growth in the high-demand hospice business.
