Penumbra (NYSE:PEN) is a major manufacturer of medical equipment and devices for thrombectomies and embolizations. Though perhaps not the most glamorous or cutting-edge niche in the medical device field, Penumbra’s area of focus and its already strong performance could set it up for long-term growth.
Is Penumbra stock being overlooked, and is now the time to buy this promising medical device business?
Why Penumbra Could Be a Long-term Growth Engine
As a leader in thrombectomy devices, Penumbra could be well-positioned to take advantage of the ongoing increase in cardiovascular disorders both in North America and around the world.
Driven by changes in lifestyles and environmental factors, among other contributors, the prevalence of cardiovascular disease and the need for the kind of thrombectomy equipment Penumbra produces keep growing year by year.
Through 2032, the worldwide market for thrombectomy devices is expected to grow at a CAGR of 7.3 percent to a total of $2.8 billion. This overall growth rate is expected to be slightly outpaced by a rate of 7.4 percent in the North American market. These secular growth trends could provide Penumbra with ongoing tailwinds for the foreseeable future.
Very similar growth trends are also expected to prevail in the embolization devices market, another area of focus for Penumbra. The growth rate in embolization devices through 2030 is expected to come in at a nearly identical 7.3 percent annually. This is hardly surprising, given that both classes of devices deal with blood clots and are being driven by the same general health trends.
Best of all for Penumbra is the fact that it still has the opportunity to build its market share by increasing the penetration of its current products while also introducing new ones from its pipeline. Specific areas of growth for its products going forward are deep-vein thrombosis and pulmonary embolism. As Penumbra builds its market share, it will be able to take even greater advantage of the market tailwinds outlined above.
Analyst expectations for Penumbra’s trajectory over the next few years call for annualized EPS growth of 29.4 percent. Though quite high, these expectations may not be out of range given the performance that Penumbra is already delivering and the sustained market growth that’s likely out in front of it.
How Is Penumbra Performing Now?
Turning to Penumbra’s current performance, the business’s Q2 report nicely illustrated the success that it is having in today’s marketplace. For the quarter, the business reported revenue of $339.5 million, up 13.4 percent from the year-ago quarter. Thrombectomy revenue was up 22.6 percent, while revenue from embolization products grew 13.9 percent.
Net income for the quarter totaled $45.3 million, a massive improvement over the $60.2 million Penumbra lost in Q2 of 2024. For the quarter, net margin was 13.3 percent, while gross margin came in at an impressive 66.0%. This gross margin was also a major improvement on the year-ago quarter, when Penumbra delivered a gross margin of 54.4 percent.
Penumbra also enjoys a strong balance sheet, with long-term debt totaling $220.5 million against a cash reserve of $424.6 million and total assets of about $1.5 billion. With this strong balance sheet as its foundation, Penumbra will likely be able to invest in growth initiatives without resorting to unhealthy levels of debt that could introduce unnecessary risks into its long-term performance picture.
What About PEN’s Valuation?
Although Penumbra may not be high on many investors’ radar, the stock’s valuation shows substantial premiums baked in to reflect forward growth. Right now, shares of PEN are trading at multiples of 72.5x earnings, 8.3 times sales and 66.1 times operating cash flow.
These high valuation metrics, however, could prove to be somewhat justified if Penumbra can deliver the kind of growth analysts expect from it. Using the trailing 12-month EPS of $3.76 as a starting point, Penumbra would produce earnings of about $13.64 per share in five years’ time if it meets the growth expectations mentioned above. Comparing this to the current price of $272.70, this would give PEN a multiple of about 20 compared to its 5-year EPS projection. Though this is still on the high side, Penumbra’s growth runway could extend well beyond the 5-year mark.
The current consensus price from analyst forecasts for PEN is $303.33, about 11 percent above the current price. This consensus suggests that, while there could still be roughly average upside in Penumbra shares, the stock may be approaching full valuation. Nonetheless, Penumbra retains a fairly strong consensus buy rating with 13 buys, 4 holds and 0 sells.
So, Is Penumbra Overlooked?
Given its high valuation and the fact that shares are already up more than 35 percent in the last year, it’s difficult to say that Penumbra is truly overlooked. With that said, there are still some compelling arguments in favor of buying the stock. As a niche producer of medical products that are expected to see growing demand over many years, Penumbra is well-situated for long-term growth.
Penumbra is decently profitable and that’s in many ways what causes it to stand out among direct competitors. The trailing 12-month net margin stands at 11.5%, while return on equity and capital over the same period were 12.5% and 10.5%, respectively.
None of this is to say, of course, that Penumbra is without its pitfalls. To begin with, the stock’s fairly high multiples leaves management with little room for earnings disappointments.
On a more fundamental level, Penumbra also faces potential competition from larger and more established medical device manufacturers. Such competition, however, hasn’t yet seemed to drag down Penumbra’s revenue growth rate, as shown by its promising results in the most recent quarter.
Overall, PEN could be a decent stock to buy and hold, though it likely won’t keep generating the very high returns it has delivered over the past 12 months. Even so, Penumbra looks like a business that may be able to keep generating steady, compounding returns for several years to come for investors willing to hold it as its earnings gradually drift upward.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.