Why the Sirtex Medical Limited share price jumped 16% on earnings guidance

The Sirtex Medical Limited (ASX:SRX) share price jumped 16% after an earnings update this morning.

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The Sirtex Medical Limited (ASX: SRX) share price jumped 16% to $18.10 after an earnings update this morning. Although dose sales of the company's SIR Y-90 microspheres (its main product) were flat, earnings before interest, tax, depreciation, and amortisation (EBITDA) are expected to be approximately $34 million for the first half of the year which ended 31 December 2017.

On a full-year basis, Sirtex expects to report EBITDA between $75 million and $85 million, compared to an underlying EBITDA of $61.5 million that was reported in the 2017 financial year. Dose sales (revenue) are also expected to improve in the second half.

While a positive update, this increase in earnings basically just reflects the fact that Sirtex has cut its research & development (R&D) activity to zero to focus on selling its SIR-Spheres. Earnings improved markedly as a result of lower staff expense and R&D costs.

Lower costs obviously leads to higher earnings, but dose sales were flat and it is yet to be seen if Sirtex can continue growing its SIR-Spheres sales, or reinvest earnings productively in new lines of business. Both are part of the new CEO's plan for the business, but it is early days yet.

At a price of $18, Sirtex has ~55.8 million shares on issue and approximately $50 million in cash, giving it an enterprise value (EV) of ~$950 million. Assuming EBITDA comes in at the bottom end of guidance, $75 million, this prices the company on an EV/EBITDA ratio of 13x, which is not overly expensive for a healthcare business.

I think Sirtex shares are reasonable value today, and I continue to hold my shares, however I think there is substantial uncertainty regarding the company's strategy. For example, will it make smart acquisitions that will increase in value?  Can it continue to grow sales even without R&D?  Will it be outcompeted by others in the market? These questions are hard to answer and as a result I would be inclined to call Sirtex a 'Hold' today.

Motley Fool contributor Sean O'Neill owns shares of Sirtex Medical Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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