Covalon Technologies Turnaround Has Inflected: Confirmed By Strong Third Quarter Earnings Performance

Q3 Earnings Review

Cliff Note #93 update:

Strong $CVALF COV(Canada Symbol) Q3 earnings report strengthens our conviction in this turnaround story.

• Sales (CAD) of $9.2 million vs $6.0 million in the prior year

• EPS (CAD) of $0.06 vs a loss of $0.02

• We are going over valuation scenarios, but we see the stock at least doubling from current levels over the next several months.

“Covalon is a patient-driven medical device company that provides innovative and cost-effective healthcare solutions for advanced wound care, infection control, and medical device coatings.”

See out July Cliff Note:

The stock is now up ~40% since being added to our MSMqi in July.

After a string of quarterly losses, this marks the second consecutive quarter of strong profitability, as a new CEO’s plan to focus on the company’s highest growth and margin areas of the business seems to be inflecting.

COV is now definitely an MSMqi Spotlight candidate. Remember that our spotlight stock selections began in April and are doing really well, so far.

If there was one slight negative in the headline numbers, it’s that gross margins were sequentially down on a much higher sequential revenue performance. However, on the earnings call, management commented:

“And our gross, sorry, and our margin performance is even stronger if you factor out adjustments we made for potential obsolete inventory. These provisions relate to some decisions that were made several years ago for some of our non-core products. Excluding these inventory provisions, the gross margin improvement versus a year ago, comes to almost a 1,000 basis points.”

So, on a normalized basis, EPS would have been even higher, something that investors should slowly begin to realize.

The better news is that sequential operating expense numbers were relatively flat on a very large sequential increase in revenue. So, operating leverage seems in tact.

Could there be some revenue volatility on a quarterly basis? Yes, but the trajectory is up, per Q3 earnings call commentary:

“I would say that our revenue streams are relatively stable and growing. Given the nature of our products, so think about medical consumables, it's, it can be challenging to predict quarterly outcomes. The reality is our current revenue base is quite small in relation to the, the opportunities that are ahead. So, while, while I've been pleased with the growth since I took over, what really attracted me to Covalon was the potential to significantly grow our revenues over a multiyear timeframe. We're obviously still in the early stages of our journey, and while there may be some variability quarter to quarter, this is the long-term outlook from, from my standpoint, from the team standpoint is very promising.”

The CEO has already agreed to be a guest on a fireside chat we will host. Can’t wait to unpack this turnaround story for all of you :)