On Friday, Wolfe Research adjusted its rating on Shockwave Medical (NASDAQ:SWAV) from Outperform to Peer Perform, citing the stock's current risk/reward balance amid speculation of a takeover by Johnson & Johnson (JNJ).
The research firm suggested that JNJ might offer between $325 and $340 per share for an all-cash deal, with a 70% probability of such a transaction occurring in the coming months. With Shockwave Medical's stock price hovering around $320, the potential upside is estimated at $5 to $20 per share.
The firm also provided a downside scenario, based on its previous discounted cash flow (DCF) analysis, which indicated a year-end 2024 standalone value of approximately $260 per share for Shockwave Medical. In the event that the anticipated acquisition does not materialize, or if significant time elapses without a deal, the stock might retreat towards this valuation, implying a potential downside of $60 from current levels.
Adjusting for the 70% likelihood of a deal against a 30% chance of no deal, the firm calculated an adjusted potential upside of $3.5 to $14, and an adjusted potential downside of $18 per share.
Wolfe Research's standalone valuation of $260 per share is anchored to a long-term DCF model, which incorporates Shockwave Medical's long-range plan for 2024-2026, projecting a 25% compound annual growth rate (CAGR) in revenue and a cumulative operating margin expansion of around 500 basis points.
The model extends over a decade, envisioning higher market penetration rates for the company's coronary and peripheral intravascular lithotripsy (IVL) devices in both U.S. and international markets. Fundamental inputs for the model include anticipated product launches through 2028, significant reimbursement catalysts, and substantial opportunities in overseas markets such as Japan, China, Germany, among others.
The firm believes that while long-term forecasts are uncertain, the model is well-founded given positive feedback from doctors, the expected cadence of product releases, and identifiable reimbursement catalysts.
InvestingPro Insights
As investors weigh Wolfe Research's adjusted rating on Shockwave Medical, real-time data and insights from InvestingPro provide a deeper financial perspective on the company. Shockwave Medical's robust Gross Profit Margin of 86.94% for the last twelve months as of Q4 2023 underscores the company's impressive profitability per unit of revenue. Additionally, the recent stock performance shows a remarkable 1 Month Price Total Return of 27.08% and an even more impressive 3 Month Price Total Return of 59.8%, highlighting strong short-term investor confidence.
However, with a Price to Earnings (P/E) Ratio of 78.14 and a Price to Book (P/B) Ratio of 17.9, Shockwave Medical is trading at high valuation multiples, which suggests that the market has high expectations for the company's future growth. This is further supported by the company's significant revenue growth of 49.11% over the last twelve months. For investors considering the potential acquisition by Johnson & Johnson, these metrics may provide valuable context to assess the company's standalone value and growth prospects.
To gain more comprehensive insights, including additional InvestingPro Tips such as the company's ability to cover interest payments and manage debt levels, visit Investing.com/pro/SWAV. There are 18 additional InvestingPro Tips available, which can be accessed with a subscription. For those interested, use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.
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