Rockwell Medical Stock: Buy This Undervalued Growth Story (NASDAQ:RMTI)

I rate Rockwell Medical, Inc. (NASDAQ:RMTI) a Strong Buy on the basis of strong growth prospects, a low valuation, and solid profitability compared to the sector. The company develops and manufactures products used in dialysis machines, which treat patients whose kidneys are failing to filter blood. In hemodialysis, RMTI’s main focus, the blood is filtered in a machine and returned to the body, contrasted with Peritoneal Dialysis, where the blood is filtered within the body. RMTI focuses on products used in the former treatment. The treatment itself is an alternative to a kidney transplant, an option that is plagued by long wait times of 3-5 years according to the National Kidney Foundation.

Dialysis is used in late stages of Chronic Kidney Disease, also known as End-Stage Kidney Disease, or ESKD, and Acute Kidney Injury, AKI, according to The National Kidney Foundation. According to The University of California San Francisco, “Nearly 750,000 patients per year in the United States and an estimated 2 million patients worldwide are affected by kidney failure.” According to the NIH, “Acute kidney injury is a common disorder worldwide, occurring in more than 13 million people every year, 85% of whom live in developing countries.”

These are just a few statistics to illustrate the size of the dialysis market. It is typically done 3 times per week and costs at least $500 per session. Doing the multiplication, I calculate an annual total addressable market approximately $1.24 Trillion. Of course, prices might have to fall to reach developing nations or even all patients in developed nations. Yet in order for these patients to have their needs met, we require more dialysis machines as well as the products that complement them.

Revenue and Product Line

Rockwell designs and manufactures that products that go into dialysis machines. According to the company description, “The company offers Triferic Dialysate and Triferic AVNU which are indicated to maintain hemoglobin in patients undergoing hemodialysis. It also manufactures, sells, delivers, and distributes hemodialysis concentrates, such as CitraPure citric acid concentrate, Dri-Sate dry acid concentrate, RenalPure liquid acid concentrate, dry acid concentrate mixer, and RenalPure and SteriLyte powder bicarbonate concentrate; and ancillary products, including cleaning agents, 6% bleach for disinfection, citric acid descale, filtration salts, and other supplies used by hemodialysis providers.”

The revenue growth has been fantastic, as shown in the chart below. Share prices have oddly not reacted to the revenue growth. In fact, as revenue has increased steadily to all time highs, the market capitalization is near all time lows. In my opinion, this discount is unwarranted. Year-over-year and forward revenue growth are both meaningfully greater than the Healthcare sector median. Management guides that 2023 revenue will be $78 to $82 Million. The price is just 39% of revenue while the sector median price is 309% of revenue.

Moat

As shown below from the latest investor presentation, Rockwell is just one of two manufacturers and suppliers that services 7,200+ dialysis clinics in the U.S. and abroad. Their largest competitor sources from Rockwell and the largest shortfall is the in the Western part of the United States, where a competitor has a $100 Million market that Rockwell is seeking to enter in 2023 through acquisition or by opening a new facility. Rockwell has most market share in the North, South, and Southwest.

The Company is furthermore developing international partnerships, as shown in the image below, also from the latest earnings presentation. The growth ambitions for global market dominance through partnership are clear. I, like many investors, put a premium on U.S. sales as they suggest that other nations will follow American leadership, and this is especially so in medicine. The moat is developing domestically and abroad.

Valuation

Taking the industry median Price/Revenue ratio of 4.09 and $78 Million in sales, this company is worth about $319 Million. I cannot find any reason why sales should be discounted as much as they are. The growth runway is long, assuming Rockwell can capitalize on just 20% of the Western United States market, by the same logic above, revenue would grow by more than 25%.

The Price/Book ratio is a bit high, as cash has been burned down to $10.9 Million from $48.7 Million in 2020. The company has largely financed itself by issuing new shares, as show in the chart below. I must take this dilution into account when determining a fully diluted shares outstanding in calculating a price target.

To arrive at a price target, I will assume $78 Million in annual revenue and calculate a market capitalization of $319 Million. I will assume the number of shares outstanding increases all the way to 20 million, as a continuation of the trend, and I still get a price of around $16/share

Risks

The largest risk I can see in this investment is dilution. The Company has financed its operating losses by issuing more and more shares. This has enabled RMTI to pay down debt, but the cash burn rate is scary to me as an investor.

Cash is less than a quarter of what it was in 2021, and there are too many costs that aren’t trending downward fast enough for the company to grow organically. Long term debt is relatively high, although it has trended downwards.

Costs exceed revenues, and this is likely the reason why many investors have discounted the revenue. However, the gap is narrowing with expenses trending downward and revenues trending upward in recent years. Gross margins are quite thin, especially compared to the sector, at just around 9%.

Conclusions

The dialysis market is globally very large and patients are generally underserved. People are not, and likely won’t be, lining up to donate a kidney. RMTI stands to serve the needs of these patients domestically and abroad, through strategic partnerships. I am watching for M&A activity to expand revenues and cut costs in order for Rockwell to find its path to profitability. Management claims it is trying to do just this. Finally, it is important to take into consideration that the median healthcare company operates at a loss, and the Seeking Alpha Quant Profitability Grade captures this fact. Relative to the sector, this is still a Strong Buy.

Editor’s Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.