Over the past six months, Integra LifeSciences has been a great trade, beating the S&P 500 by 25.3%. Its stock price has climbed to $17.91, representing a healthy 35.3% increase. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.
Is there a buying opportunity in Integra LifeSciences, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Integra LifeSciences Will Underperform?
We’re glad investors have benefited from the price increase, but we’re sitting this one out for now. Here are three reasons why IART doesn’t excite us, plus one stock we’d rather own.
1. Slow Organic Growth Suggests Waning Demand In Core Business
Investors interested in Surgical Equipment & Consumables - Specialty companies should track organic revenue in addition to reported revenue. This metric gives visibility into Integra LifeSciences’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.
Over the last two years, Integra LifeSciences’s organic revenue averaged 2.3% year-on-year growth. This performance slightly lagged the sector and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations. 
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Integra LifeSciences, its EPS declined by 2.4% annually over the last five years while its revenue grew by 3.6%. This tells us the company became less profitable on a per-share basis as it expanded.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Integra LifeSciences’s $2.04 billion of debt exceeds the $236.8 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $330.1 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Integra LifeSciences could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Integra LifeSciences can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Integra LifeSciences falls short of our quality standards. With its shares outperforming the market lately, the stock trades at 6.5× forward P/E (or $17.91 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d recommend looking at a dominant aerospace business that has perfected its M&A strategy.
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