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Speculative Bet on This Small-Cap Industrial Stock – SMED

Feb 08, 2022 | Team Kalkine
Speculative Bet on This Small-Cap Industrial Stock – SMED

Sharps Compliance Corp.

SMED Details

Sharps Compliance Corp. (NYSE: SMED) is a leading national health waste management provider specializing in regulated waste streams, pharmaceuticals, and hazardous waste. It offers comprehensive solutions for managing regulated medical waste, hazardous waste, and unused medications.

Latest News:

  • Strategic Acquisition: On February 7, 2022, SMED completed the acquisition of Midwest Medical Waste, Inc., a full-service, route-based provider of medical and hazardous waste solutions in Kansas, with over 600 customer sites for a total consideration of USD 4.35 million payable 75% in cash and 25% in the stock. This acquisition aims to supplement SMED’s organic growth activities with complementary acquisitions that expand its route density and market reach.

Q2FY22 Results:

  • Growth in Topline: The company reported YoY growth of 10.98% in overall revenue to USD 18.88 million in Q2FY22 (ended December 31, 2021) from USD 17.01 million in Q2FY21, attributable to higher product returns on prior period sales, net of current year deferred revenue, plus increased billings in the Professional and Retail segments.
  • Improvement in Profitability: In Q2FY22, SMED's net income increased to USD 1.44 million from USD 1.23 million in Q2FY21.
  • Cash and Debt Position: As of December 31, 2021, the company had cash & cash equivalents of USD 36.00 million and total debt of USD 4.65 million.

Key Risk:

  • Customer Concentration Risk: In FY21 and FY20, SMED's top two customers contributed around 45% and 35% of total revenue, respectively, and 36% and 44% of total accounts receivables. Too much reliance on a limited number of customers could harm the company's operations in the long run.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation

(Analysis by Kalkine Group)

* % Premium/(Discount) is based on our assessment of the company's FY1 trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation:

SMED's share price declined by 57.47% in the past nine months and is currently leaning towards the lower-band of the 52-week range of USD 6.27 to USD 18.67. We have valued the stock using the EV/Sales-based relative valuation methodology and arrived at a target price of USD 8.03.

Considering the significant correction in stock price, low leverage, high net-profit margins, strategic acquisition, current valuation, and associated risks, we recommend a "Speculative Buy" rating on the stock at the current price of USD 6.52, up 2.35% as of February 07, 2022, 03:13 PM ET.

Three-Year Technical Price Chart (as on February 07, 2022, at 03:13 PM ET). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary: