Masimo Corporation Fell 12.7% in August -- but Why?

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What happened

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Shares of Masimo Corporation (NASDAQ: MASI), a medical-device company focused on noninvasive testing equipment, fell by more than 12% in August, according to data from S&P Global Market Intelligence. The cause of the decline isn't entirely clear, because the company reported strong second-quarter results and even raised full-year guidance.

So what

Here's a look back at the headline numbers from the company's second quarter:

  • Revenue grew 12% to $193 million. This figure was $4 million ahead of what Wall Street had expected.
  • Net income soared 56% to $47 million, or $0.83 per share. This number also easily surpassed the $0.71 in earnings per share that analysts were projecting. However, it's worth noting that the year-ago period included a one-time tax hit of $6.9 million. Excluding this impact, earnings growth would have "only" been 27% year over year.
  • The strong quarterly results allowed management to raise its full-year guidance. The company bumped up its 2017 revenue guidance by $10 million to $769 million. The EPS forecast increased by $0.15 to $2.80.

Even though Masimo posted great results and raised guidance, its stock still fell about 10% in the trading session following this report.

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What can explain the drop? While there's no way to know for sure, my hunch is that some traders simply felt that the company's valuation had simply gotten ahead of itself. After all, volatility is to be expected when your stock is trading north of 30 times forward earnings.

Now what

Short-term price movements aside, things are looking up for Masimo. Revenue from the company's Rainbow products is growing by double digits. Royalties from the company's settlements with Medtronic and Koninklijke Philips Electronics NV are also rolling in and grew by more than 26% in the most recent quarter. At the same time, the company is doing a great job of controlling expenses. That's a solid combination that helps to explain why the company's profits are growing so rapidly.

Between its direct sales and original equipment manufacturing businesses, the future continues to look bright for tMasimo's oxygen meters. If the company can continue to grow its top line at a double-digit rate while keeping its expense growth in check, then its operating leverage should ensure that profit growth remains strong for years to come. That growth potential makes me think that Masimo's stock is worth buying today, even though shares are currently trading at more than 33 times forward earnings estimates.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool owns shares of Medtronic. The Motley Fool recommends Masimo. The Motley Fool has a disclosure policy.