TransMedics: Every Hero Becomes A Bore At Last

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TransMedics Group, Inc. faces significant challenges due to aircraft maintenance issues and rising aviation costs, leading to a 42% stock price drop and a HOLD rating.Revenue shortfall is attributed ...

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(NASDAQ:TMDX) warned that the upcoming aircraft maintenance challenges and aviation operating expenses would shake investors' confidence at the end of this year. Unfortunately, this also coincided with poor revenue performance due to a slump in national transplants, which also caused the price to plummet by almost 42% from my last analysis to the time of writing. The frenzy is over. Management warned of these issues on the previous earnings call, and insiders have been selling off. Still, many analysts and investors did not heed the warning, as management kept guidance unadjusted. Yes, TransMedics devices are innovative and transformative, but they have reached a growth plateau, and the complications of running an airline are not helping. The transplant industry is complex, and adopting TransMedics’ technology requires the coordination of transplant surgeons, hospital operating room times, transplant centers, ground and air logistics, organ procurement organizations, medicare and insurer payers, and many, many more factors. I have no doubt they will continue to perform well, but this quarter has made it evident that it won’t be at the pace the Street expected. Thus, I’m moving to a HOLD until we see Q4 results. I used Intuitive Surgical, Inc. (ISRG) in my last analysis, and it is still a good proxy for long-term value. ISRG faces similar business challenges, but is an example of this business at scale. At 74X (ISRG’s Forward P/E), on an expected EPS of $1.17 in 2025: I have an $86.58 target price. Note that ISRG does not have an aviation component. Given the unknowns now surfacing with TMDX, the price could be even lower if we see significant margin degradation over the coming quarters. Some Seeking Alpha analysts are also worried about ISRG's overvaluation. Revenue Shortfall — Qualitative On the earnings call, the team repeatedly highlighted the shortfall in revenue expectations was not due to pressure on pricing or market share, but the fall in overall transplant volume nationally. Callers were in doubt: “So Waleed, I'd be remiss [garbled] in quite a shock. And Waleed, trying to connect all your comments together, I confess I'm still struggling to understand a few moving parts…So maybe, Waleed, help us understand something gave this quarter and just the overall market share doesn't seem to explain. I'm curious how you hold up 10,000 units by 2028. I know it's a long-winded question. I'm still struggling to understand the sudden shift in gears.” The CEO’s initial response… “Suraj, there is no shift in gears. It's your perception of reality.” With some input from the CFO, we start to understand what hasn’t been made crystal clear—the shortfall isn’t only the overall transplant volume that has fallen; the amount charged for the service component (including aviation logistics) is also part of the decline. “…be careful of looking at revenue as the only surrogate for case volume because Stephen is absolutely correct. When we report revenue per organ, it includes both the case volume and the service component. And as Stephen said, because of the safety of OCS, we can do more car transport for hearts up to four hours now with the NOP and not use planes versus liver, we're in the quarter, we saw a higher longer distance transport, which may have increased the service portion of the total revenue for liver. So that could be the disconnect here.” They may still reach 10,000 transplants in 2028, but at what margin and average revenue? Shortfall – Quantitative My perspective is always on the aviation side due to my background – flying a private jet for organ transport generally costs from $10,000 to $50,000. Suppose they do more transport by car, which costs hundreds or thousands, using the device to extend the usability of the organ…but they still have the overhead costs of a large aviation operation. There will be more significant fluctuations in revenue and margins. Presumably, this is what we’re seeing in Q3, and now the market is factoring in the unpredictability, which they weren’t before. Let’s assume Q3 is the new normal for a valuation exercise. The team still believes, as I do, that 10,000 transplants are possible in 2028, citing their traction: 2022 had 1,000 transplants, 2023 had 2,300 transplants, and 2024 estimated 3,500-4000 transplants (I use 3,750 for the analysis below). The margins may have shifted substantially, but I’m using Q3 results to project out 2025-2028 for a “doomsday” estimate.                Transplants Revenue (Millions) Gross Profit (Millions) Gross Margin Rev. Per Transplant Margin Per Transplant Net Income NI Per Transplant Basic EPS Shares Outstanding   2022 1000 93.5 65.3 69.8% $93,500 $65,300 -36.2 $ (36,200.00) ($1.23) 29.6     2023 2,300 241.6 154.1 63.8% $105,043 $67,000 -25 $ (10,869.57) ($0.77) 32.5     Q3 2024* 937.5 108.8 60.8 55.9% $116,053 $64,853 4.2 $4,480.00 $0.99 33.4     2024 EST** 3750 435 243.1 55.9% $116,000 $64,824 34.8 $9,280.00 $1.04 33.4     2025 EST 5250 609 340.3 55.9% $116,000 $64,824 34.7 $6,610.29 $1.04 33.4     2026 EST 6750 783 437.6 55.9% $116,000 $64,824 44.6 $6,610.29 $1.34 33.4     2027 EST 8250 957 534.8 55.9% $116,000 $64,824 54.5 $6,610.29 $1.63 33.4     2028 Goal 10,000 1160 648.2 55.9% $116,000 $64,824 66.1 $6,610.29 $1.98 33.4     Click to enlarge Assumptions:  One-time aviation maintenance (MX) costs had a non-recurring impact of $2 million on Net Income in Q3 2024 937.5 transplants in Q3 based on 3,750 annually in 2024 Net Income declines to ~$6610 per transplant from now on (Q4 NI adjusted up for non-recurring MX) 2024 EST is higher overall due to blending the new business model with the old; 2025 is assuming the same growth in transplant volume, with the lower margins and fixed costs of Q3 2024 No dilution.  $1.17 EPS is the average between forward EPS expectations and the “doomsday” figures in my calculations, and using the 74X Forward Price/Earnings of ISRG, we get to the target of $86.58:          EST 2025 ISRG P/E FWD Est. Share Price   Worst $1.04 74 $76.96   Projected $1.30 74 $96.20   Average $1.17 74 $86.58   Click to enlarge Maintenance Woes On the Q3 earnings call, the team revealed that only 10 of the company’s 18 aircraft were operational. In Q2, the CFO stated, “I'd like to note and underscore that this guidance contemplates the fact that a few of our aircraft will be down for routine scheduled maintenance, the second half of 2024, which could temporarily limit our pace of growth of our logistics revenue in H2.” 8 aircraft out of 18 is more than a few…so unscheduled maintenance is coming in much higher than expected, causing missed revenue opportunities. In the last call, a challenge was pilots; in this call, maintenance was to blame. Since COVID-19, the aviation industry has yet to fully recover from breakdowns in supply chain issues. These include a need for more parts, rental engines, qualified maintenance personnel, and more. Aircraft are taking longer and costing more to get out of service than ever. TransMedics is addressing this: “Importantly, we also made a strategic investment in our internal aircraft maintenance infrastructure by building and staffing at TransMedics aviation maintenance hub in Dallas, Texas in Q3. These investments were made to maximize the operational efficiency of our current and growing fleet and to prepare for the expected growth in demand for OCS NOP missions in 2025 and beyond.” (CEO on Q3 Call.) Conclusion We need to see how TransMedics Group, Inc. overcomes these hurdles over the coming quarters before assuming a return to previous Net Income expectations. The overhead of aircraft sitting on the ground and not generating revenue could be a factor they overcome, but it must be a large part of the Net Income results in Q3.  If I know anything about solving issues in aviation operations, I know they take time to work out. Solutions are found in a matter of months, not days. Q4 will be vital to understand where TMDX is heading directionally.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"-1","news_tag":"Business Data,analysis","news_rank":0,"symbols":[],"gpt_button":0},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479250549"}