Masimo Corporation (NASDAQ: MASI), a healthcare firm with a market capitalization of $4.4 billion, currently trades at an EBITDA Multiple of 18.9x which is above the sector’s median multiple of 16.2x. Although this makes MASI look unattractive, investors may change their mind after reviewing the assumptions behind the EV / EBITDA ratio. In the post below, I calculate Masimo’s fair value using an EBITDA Multiples valuation.
How To Interpret Masimo’s EBITDA Multiple
A multiples valuation, also known as a comparable companies analysis, determines the value of a subject company by benchmarking the subject’s financial performance against companies deemed to be similar. We can then determine if a company is undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation multiples.
EV / EBITDA, also known as Enterprise Value-to-EBITDA Multiple or an EBITDA Multiple, measures the dollars in Enterprise Value for each dollar of EBITDA. Its key benefit over the P/E multiple is that it’s capital structure-neutral, and, therefore, better at comparing companies with different levels of debt. The general formula behind an EBITDA Multiples valuation model is the following:
Enterprise Value = EBITDA x Selected Multiple
The EV / EBITDA ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Masimo’s EV / EBITDA ratio to its peer group that includes Teleflex Incorporated (NYSE: TFX), Cantel Medical Corp. (NYSE: CMD), Edwards Lifesciences Corporation (NYSE: EW) and Boston Scientific Corporation (NYSE: BSX).
Since Masimo’s EV / EBITDA ratio of 18.9x is lower than the median of its peers (25.6x), it means that investors are paying less than they should for each dollar of MASI’s EBITDA. As such, our analysis shows that MASI represents an undervalued stock. Furthermore, finbox.io’s EV / EBITDA Ratio Model calculates a fair value of $108.42 per share which implies 25.0% upside.
I selected a fair multiple of 24.3x in my analysis by averaging Masimo’s current EV / EBITDA ratio with its peer group.
EBITDA Multiple Flaws
While this approach typically provides a reasonable valuation range, it is important to understand that our conclusion rests on some important assumptions. The first being that the selected peer group actually contains companies that truly are similar to Masimo. The second important assumption is that the selected peer group stocks are being fairly valued by the market.
If the assumptions above do not hold to be true, then the difference in EV / EBITDA ratios could be due to a variety of factors. For example, if you accidentally compare Masimo with higher growth companies, then its EBITDA multiple would naturally be lower than its peers since investors reward high growth stocks with a higher price.
source: EBITDA multiples model
Now if the second assumption does not hold true, Masimo’s lower multiple may be because firms in our peer group are being overvalued by the market.
What To Do Next
As a current investor, you may have already conducted fundamental analysis on the company and its stock so its current undervaluation could signal a potential buying opportunity to increase your position in MASI. But keep in mind the EV / EBITDA ratio’s potential flaws when applying this valuation approach. It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. I highly recommend that you continue your research on Masimo by taking a look at the following:
Valuation Metrics: what is Masimo’s price to book ratio and how does it compare to its peers? Analyze Price / Book here.
Risk Metrics: what is Masimo’s CapEx coverage? This is the amount a company outlays for capital assets for each dollar it generates from those investments. View the company’s CapEx coverage here.
Efficiency Metrics: inventory turnover is a ratio that measures the number of times a company’s inventory is sold and replaced over the year. View Masimo’s inventory turnover here.
Author: Matt Hogan
Expertise: Valuation, financial statement analysis
Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock.
Matt can be reached at firstname.lastname@example.org.
As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.