Believes InMode's Cash Balance of Roughly 55% of its Market Cap is Grossly Inefficient
Asserts the Current Valuation Offers an Unprecedented Opportunity to Create Shareholder Return
MIAMI, July 25, 2024 /PRNewswire/ -- DOMA Perpetual Capital Management LLC today sent a letter to the Board of Directors of InMode (NYSE: INMD) urging the Board to execute a 40% tender offer of the stock.
The letter can be downloaded here.
The full text of the letter follows:
July 25, 2024
To the Board Members of InMode:
DOMA Perpetual Capital Management is an asset manager focused on generating long-term value for its investors. DOMA is one of the largest shareholders of InMode (the "Company").
Over the last few months, we have communicated privately with the Board of Directors of the Company (the "Board") about our concerns regarding the Company's capital allocation strategy and to urge the Company to prioritize finding new ways to make the equipment acquisition process more efficient for its clients. During this period, InMode's stock price has continued to decline, as market participants are losing faith in the capacity of the Board and the Company's management to generate returns for shareholders and allocate capital in an efficient way. We believe this Board needs a strong independent voice that will advocate for the interests of the Company's shareholders.
Early this year, we brought to the Board's attention the misguided and financially-uninformed comments of InMode's CEO and former Chairman, Moshe Mizrahyi. These comments, made on multiple occasions, evinced a lack of understanding of the basic tenets of share buybacks and capital allocation. Shortly thereafter, the Board announced a new Chairman, Dr. Michael Anghel. Dr. Anghelii possesses a background in finance and seemed to understand that issuing a dividend at the lowest valuation in the history of a company is a significant capital allocation mistake and sends the wrong message to investors. The Board also announced a share buyback, reversing course on Mr. Mizrahy's prior statementsiii. However, the announced buyback falls short as it amounts to less than the Company's free cash flow in a normalized year.
InMode's stock price is plummeting, along with its valuation. InMode holds nearly $800 million in cash and marketable securities, which is approximately 55% of the Company's current market capitalizationiv. In addition, the business possesses a large and healthy free cash flow, no debt, approximately 80% gross marginv, as well as a moat around its intellectual property, preventing new market entrants. We believe InMode completely dominates its sector.
The Board has spent significant time looking for companies to acquire, yet we believe it has failed to consummate any attractive acquisitions due to valuationsvi. In the current market, where valuations are stretched, the task of finding a quality company with valuable intellectual property at a reasonable purchase price is exceedingly challenging. By contrast, InMode, a company with margins and return of equity superior to those of any potential acquisition, has experienced a significant valuation contraction. We challenge the Board to find an acquisition target in the minimally invasive or non-invasive cosmetic procedure market with better financial returns, margins, and intellectual property assets than InMode, which has an irrationally depressed valuation. We believe that it does not exist.
In order to create proper and material shareholder return, InMode's Board should immediately approve a tender offer of 40% of the Company's stock, to be followed by the already announced buyback.
The Company's shareholders have been made to endure subpar performance for too long. We believe the Board is destroying value with an inefficient and ineffective capital allocation strategy. There is ample, unused flexibility to generate shareholder return. Keeping roughly $800 million dollars on the balance sheet of a Company with 80% margin and no debt, with the hope that an attractive acquisition will magically appear, is wishful thinking and is detrimental to shareholders. While the Board is buying back stock in "eye dropper" amounts, the opportunity to buy back 40% of the Company at its current, irrationally depressed valuation could quickly vanish. The tender must be approved immediately. We believe that a decision not to proceed with the tender will prove the Board is either unable to understand the massive return opportunity in front of it or that the Board is unwilling to uphold its fiduciary responsibility to shareholders. Doing nothing at this critical moment will demonstrate that the board lacks independence and the Company needs shareholder-led change on the board, with focused, aligned directors who are accountable to its owners.
The tender offer we are suggesting will only use about $600 million dollars. InMode would still have close to $200 million in cash as well as all its debt capacity. Assuming 3x of next year's debt and EBITDA, we estimate that the Company would have another approximately $500 million of debt capacity that could be used for a potential future acquisition. If the Company needed to execute a large acquisition that required use of its debt capacity, it could stop the regular buyback after the tender and de-leverage quickly, due to its large and healthy free cash flow. Again, InMode possesses net income margins of roughly 40%. The Board is fundamentally mismanaging the balance sheet by ignoring shareholder returns.
It is clear that a potential acquisition in neuromodulators or fillers is the right long-term move for the Company to diversify its intellectual property, but there are many years ahead before InMode's patents expire. Private markets do not deviate much from public valuations and generous valuations in the sector – shown by publicly traded companies like Galderma or Evolus – mean that acquisitions cannot be made in the current market without overpaying. This is not a buyers' market and maintaining so much cash on the balance sheet with the hope of finding an acquisition is hurting shareholders. Compared to InMode's business, the barriers of entry in neuromodulators or fillers are lower and the margin profile of these companies is inferior. We believe InMode's moat is superior to any potential acquisition that the Company could execute. There are many years ahead to diversify the Company's intellectual property. An M&A deal does not have to be done now, next year, or ever, as InMode continues to have an incredible R&D department capable of pushing the boundaries and developing new intellectual property internally.
The current slowdown in equipment leasing is due to macro factors and it will likely dissipate in coming quarters, as central banks around the globe continue to lower rates. In the US, the market is predicting multiple rate cuts this yearvii. As such, the opportunity to buy back 40% of the Company could disappear. In our view, InMode's free cash flow will continue to grow as the Company expands internationally and its customers begin a cycle of capital equipment replacement in the US, all while the pricing power of the Company remains untapped. We believe InMode's best years are ahead; its cash flow will continue to grow, creating more opportunities for hoarding large cash at hand for future M&A execution.
The strategies laid out below represent a sensible and thoughtful capital allocation program for InMode:
It appears the Board thinks it has done enough by issuing a small buyback in relationship to the cash at hand, debt capacity and free cash flow of the firm. We believe the Board is mistaken. It is our view that InMode could be at significant risk of a hostile takeover from leverage buyout players due to its depressed valuation, high margins, superior intellectual property and the fact that the Company is full of cash and possesses no debt. This Board needs to act quickly. It must return cash to its shareholders with a large tender offer, thus taking advantage of InMode's valuation opportunity in public markets. The Board has legal and fiduciary responsibility to its shareholders and the path to honoring that responsibility is clear.
Sincerely,
Pedro Escudero
CEO & CIO
DOMA Perpetual Capital Management LLC
i InMode Q1 2024 Earnings Call
ii InMode Q1 2024 Earnings Call
iii InMode Q3 2023 Earnings Call
iv InMode Q1 2024 Earnings Release, DOMA Perpetual Internal Calculations
v InMode Q1 2024 Earnings Release & Call
vi InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024, InMode Jefferies Global Healthcare Conference 2024 Presentation 06.05.2024
vii Melloy, J. (2024, July 16). Traders see the odds of a fed rate cut by September at 100%. CNBC. https://www.cnbc.com/2024/07/16/traders-see-the-odds-of-a-fed-rate-cut-by-september-at-100percent.html
viii InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024, InMode BNPP Exane 2nd Annual Aesthetics Day 05.21.2024
ix InMode BNPP Exane 2nd Annual Aesthetics Day 05.21.2024, InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024
x DOMA Internal Calculations, Bloomberg Database
xi InMode 23rd Annual Needham Virtual Healthcare Conference Presentation 04.09.2024
SOURCE DOMA Perpetual
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