Warnings First
I have written a few DDs in the past and have done alright. I’m constantly learning from mistakes along the way. There have been some folks in the past that have bet too large based on what they read in my DD’s and I don’t want that to happen again. Please do your own research. I’m sharing mine on RVP as I find it interesting and to get feedback and jumpstart discussion. Also, I’m not as crazy bullish on this one as I was with the last 2, but I think it’s interesting & enough of a risk/reward to take a position in shares. If you take a position, don’t over-extend on this one. You could lose a lot.
What is RVP?
RVP, or Retractable Technologies is a little $400M company with about 200 employees that makes needles and other injection/blood draw medical devices. They basically created a new type of needle that retracts to reduce the risk that a healthcare worker or anyone else gets stuck with a used needle, which reduces the risk of disease transmission from patient to healthcare worker.
They have several products, but their main moneymaker is the VanishPoint syringe. It’s a syringe where the needle automatically retracts into the plastic tube at injection:
This product basically has 2 benefits:
Reduced needlestick injuries, of which there are several hundred thousand in the US every year, and disposable needles make about 27% of all “sharps” injuries per the CDC
Normal needles leave a little bit of “dead space” that mean there is drug left over. RVP’s needles eliminate the dead space means that less drug is required.
There’s a great 3 min video here giving you a glimpse of the factory & pitch: https://dfw.cbslocal.com/2021/04/22/texas-factory-syringes-covid-19-vaccines/
Market Headwinds and Tailwinds
Market Size: The global market for disposable syringes is estimated to be in a range from $2B to $13B. All sources state the market is growing. That’s a pretty wide range for estimates, but the point is that RVP arguably has one of the best products out there, with relatively low market adoption so far, in a large and growing market. Its last quarterly revenue was a massive increase at $50M, but even if that was all organic sales to hospitals (it wasn’t) it would only represent 2.5% of the disposable syringe market. There is a lot of upside.
Headwinds:
RVP has been struggling for many years to break into the market. One of the main competitors is Becton Dickinson and Co (BDX) - a $70B (market cap) healthcare product behemoth that tends to play dirty to prevent competition.
In fact, RVP and BDX have been locked in lawsuits for years, as RVP was suing BDX for patent infringement, antitrust practices, and misleading marketing. The company still seems to be fighting BDX.
On one of its pages, RVP states that it continues to fight lack of access to its products:
Tailwinds:
Covid-19 has been a massive boost to RVP’s business.
In 2020, the federal government began buying loads of needles from RVP to administer vaccines. RVP is now one of the main providers of the needles used for the Covid-19 vaccine.
Additionally, NIOSH has been running a “stop sticks” campaign for years to try and reduce needlestick injuries.
It’s possible that the increased awareness of RVP’s needles among healthcare workers as they administer vaccines might lead to more adoption of their product in everyday hospital use.
Here is a visualization of RVP’s revenue growth from macrotrends:
Financials
I compared the most recent quarterly earnings report (10-Q) to the 10-Q from the same period the previous year, and also compared those reports to BDX in the same time frame (2021 and 2020).
Here is the comparison:
There are a lot of things to like here:
Revenue: RVP’s revenue has been absolutely exploding. The big driver for revenue has been a Federal contract (that has been extended 3 times, and now goes until March 2022) worth roughly $100MM.
On the minus side, RVP states that 75% of revenue came from US gov in its last quarterly report. Without the federal component, revenue would only have been about $15M or about a 12% increase from the prior year Q/Q.
However, RVP spent $12M in Q1 on Plant, property, and equipment and shared in this video that they were expanding production. This would suggest the company believes the orders would continue and needed to ramp up their ability to produce.
Profit: RVP is making very high net profit margins, even after paying its founder a 5% royalty for all revenues from the syringes he invented (what a Chad).
Great balance sheet.
When you look at BDX, it looks like they have $24B in net assets (total assets - total liabilities). However, BDX is claiming to have about $30B in intangible assets: it claims $23B in Goodwill, along with another $10B in the value of its “Developed Technology” and “Customer Relationships”. WTF - this is just a fake value ascribed to their business. On the flipside, they have $30B in very real liabilities.
RVP’s numbers are clean af. $30M in cash up 300% y/y. There are no intangible assets on its 10-Q. Its debt is a small fraction of its cash holdings.
Now the P/E here is a little insane. First, the P/E calculations generally use TTM - trailing twelve month earnings. If you look at the TTM chart above, RVP’s TTM revenues have been exploding, so as earnings have gone up and the share price hasn’t, this is looking more and more like a value play - which is insane given its growth.
Look at this P/E chart for RVP - this thing just looks cheap.
It is priced like a value stock. Even without the $37M in federal earnings in Q1 it’s cheap. After removing RVP’s net assets from its market cap, the market is only valuing RVP at 7 times its last quarter’s revenue (($409M-$68M)/$50M).
The last time I saw a value play like this, it was a YouTuber talking about something with some really deep f’in value, and this looks like deep f’in value. I do not think this has the same meme power, and while it does have some short interest it doesn’t have the same short squeeze potential, but it’s a very interesting value play.
Float, Institutional/Insider Holdings, and Short Interest
There are about 34M shares outstanding of RVP.
Institutional ownership is low at about 17%. I’m interested particularly in Renaissance technologies holding this. They were holding both of my prior plays when I searched institutional holdings. Interestingly they reduced their positions about 60% the last filing in march of this year. Possibly when it spiked to $20/share.
Insider ownership is high at over 50% with the majority held by the CEO/Founder (Thomas Shaw). Shaw has not sold any shares any time recently (in fact he bought in December 2020 at 12.85).
So the non-insider float is about 16M shares.
Short interest is currently sitting at ~3M shares. However, the daily trading volume on RVP is very low, so that relatively low short interest (20% of float) actually needs 6.4 days to cover at current volume levels.
I don’t necessarily believe this is a short squeeze play; however, I believe the short thesis is “RVP’s federal revenue will go away and they cannot convert to real revenue”. Honestly, it’s not a bad thesis (see bearish thoughts below). However, if this thesis is invalidated, it will be very difficult for shorts to exit.
Shorts are extremely active on RVP. Take a look at the daily FINRA short volume - over 50% of share activity daily is short volume! This is higher than the ratios I remember on any other stock I’ve traded. I also don’t see any evidence that shorts have covered their exits via calls, as there isn’t enough OI on future calls here to allow for an exit for shorts. So while this isn’t a short squeeze play, there’s a chance that bullish revenue growth / sustained revenue will lead to a bad exit for shorts.
It’s also worth noting that RVP is conducting a $10M share buyback that they announced in June. Thus far they have only spent $1M and they are updating here. If RVP believed their revenue was short-term it’s unlikely they would have diverted 30% of their cash towards share buybacks (unless, they are terrible at business - which is possible).
Bullish thoughts
These are things I like about this stock.
Easy to understand: This is a really easy-to-understand business. They make a good product and try to sell it to hospitals. Covid and the federal government gave them a boost. It might turn into long-term revenue growth.
Actual revenue: They have real revenue based on delivered products. Additionally, they have invested heavily in expansion of their production. If they did not believe that future demand was likely, I don’t believe they would have spent $12M on greater output.
Extremely high ceiling: RVP is not even close to achieving significant market share. Achieving 10% market share in the US alone would result in annual revenues of $200M - which is a massive bump from their current revenue and yet a small blip compared to BDX’s $5B annual revenue across their much larger array of products. It’s not impossible to imagine that arguably the best product on the market achieves more market share.
High Net Profit Margins: High net profit margins means they have room to modify their sales strategy to break into higher market share. For example, they may choose to offer discounts to hospitals based on certain volume incentives.
Cash Reserves: There’s a significant amount of cash they’re building up, even after accounting for $10M used for share buybacks, that could allow them to work on marketing / sales spend.
Federal Contract: The federal contract is a plus and a minus.
On the one hand, it is a price-insensitive buyer that might have ongoing demand. It’s not hard for me to imagine that after Covid the US realized that it is generally woefully prepared for future pandemics, and may choose to stockpile syringes not only for future variants of Covid (Delta, Lambda, etc.) but also future potential viruses that might threaten the economy. It would seem that stockpiling syringes is a very simple national defense play as they announced here.
Additionally, more exposure of the RVP product line to healthcare workers raises awareness, and if the product is actually better/safer there is a chance we’ll see more buying down the road in hospitals.
On the other hand, if the federal contract disappears AND RVP has not made headway into hospital systems, revenue is going to crash.
Squeeze potential: Like I mentioned above, if the fundamentals stick, shorts will have a really hard time getting out of their positions with the low volume here.
Bearish thoughts
There are many reasons to stay away though. I mentioned I’m not as bullish as some of my other plays, and here’s a few reasons why:
Poor investor relations management: There’s no way RVP is going to get good analyst coverage given the poor showing on investor relations. Here’s a simple example: No one even knows when their earnings reports are happening. The next earnings is “estimated” to be August 13. Normal companies put out a press release stating something like “earnings will be released on XX before / after market”. Nope, RVP just dumps it when it’s ready. No announcement of when it’s happening.
Earnings release is (likely) around the corner: With the US govt making up $37M of RVP’s sales last quarter, the big question will be whether that revenue is continuing. Any weakness here will be a bad sign, and an opportunity for shorts to tank the shares after earnings. I’ve noticed that with heavily shorted stocks, after-earnings performance tends to be weak as shorts pile on natural profit-taking to push the price down.
Low liquidity / high market impact:
This is one of my biggest problems with RVP - there is very little volume (20-day average daily volume is sitting at 300K shares), and any significant volume has a massive price impact. I’ve been adding in share blocks of 1000 at a time and have only been able to get good fills by leaving the order open and waiting for dips. There is little filling at the mid.
This means that it is a hard to enter, hard to exit stock. This is a fine place to be if you are bullish for a transformation play (which is where I think I’m landing) but if you’re looking to trade it short term it might be difficult. This also means that RVP is a great stock for small positions but is much difficult to have larger positions if you are looking short term.
This also means shorts can move the price down significantly with little volume. For example, take a look at this picture of price and volume from today, 8/10/2021. There is practically no volume for 20 mins and then 50K shares are dumped all at once shaving 2% off of the price / market cap of the company. In other words, sellers were able to remove $8M of market cap from RVP by selling/shorting $600K worth of shares.
Low options volume: Along with low share volume, there is incredibly low options volume. This means that if you’re playing options you likely need to think about holding to expiry, b/c otherwise you’re going to get killed on spreads on the way in and the way out.
Fed Revenue: I mentioned this numerous times but the US government makes up 75% of their current revenue. The market is likely pricing in some of this revenue going away as otherwise the market cap / revenue makes no sense, but it’s still scary when you look at this breakdown from their most recent 10-Q. The biggest question with RVP is how much of its revenue spike will continue.
Short sellers: Short sellers will likely take advantage of any weak earnings to pile-on and push the price down.
Management: I’m not entirely confident in the management of the business. It’s amazing to see the growth from the federal contract, but I am surprised that spending on sales decreased. IMO they need to be investing in sales & growth NOW (not just production) to ensure a foothold in the market. It seems like management is a little more focused on litigation than sales & marketing.
A better product doesn’t mean product-market fit: There are many reasons why even if they had the best product, they would not get sales.
Product costs: Their syringe could be too expensive relative to competitors. Hospitals “care” for their workers but maybe not enough to pay for more expensive syringes, of which they have to buy millions a year.
Hospital purchasing systems: In order to get into a hospital, you need to be a) in the procurement system b) have a buyer who is aware of your product and how/whether to buy it c) be set up as a trusted merchant d) get the ok from superiors to spend on RVP’s more expensive syringes e) be trusted that you can deliver the syringes on time and consistently. It is difficult to cross each of these barriers.
Awareness: It doesn’t matter how great your product is if no one knows about it. I have gotten poked numerous times by vaccines/needles and didn’t know retractable needles were a thing.
Competition is dirty:
I’ve read enough into the lawsuits and heard enough about BDX to understand that they play dirty. I’m not trading for justice here, so the reality might just be that BDX knows how to maintain its market share by leveraging all sorts of tricks, while RVP watches in frustration that the product it has doesn’t get adopted.
There are other options to the VanishPoint needle:
Unfortunately, after years of trying to get the VanishPoint needle into the market unsuccessfully, competitors have caught up a bit and found ways to build other “safety needles”
There’s a great article here on the various other safety syringes out there. Vanishpoint is one of 3 “passive” safety needles; one of the other two is by BDX. I’m unclear on how they were able to build/market/sell what looks to be a clear copy of the RVP design given RVP’s patents, but I guess that’s why RVP spent so long trying to sue BDX.
Some Trading Tips & Warnings
Read all the bearish notes above. This really could go either way. It depends on whether or not revenue grows and RVP establishes a foothold. My core hypothesis with my shares is that the US govt is not going to stop buying any time soon with a) potential booster shots around the corner and b) preparing for future pandemics, as syringes can be stored for the future. I also believe that RVP, if managed well, could leverage the increased awareness of its products and build a strong sales team. I’m hoping to see investments in this area.
Careful with calls due to low volume: Call volume is tiny. So you’re going to need to buy at the ask and sell at the bid - and/or hold to expiry. If you’re buying calls, look for the strikes with highest volume to get the best fills.
Save dry powder to buy on dips. Dips manufactured by shorts are buying opportunities. Take advantage of folks with paper hands to capture shares at low points. RVP has incredible daily volatility. Set a low limit buy and just wait for the order to fill. Have patience when buying. RVP is up 30% from its low at the end of may but flat since June 8, just a week or two later. You’d be much happier had you bought at the end of May than buying on June 8.
Don’t bet more than you can afford to lose. RVP dropped 10% in one day in a crazy momentum reversal after climbing 7% the day before. It was trading at <$1/share a couple of years ago prior to finding its footing. It could go back if it loses its footing.
Don’t sell on dips. Low volume stock + easy selloffs on dips. If you sell on dips you’ll just accelerate a selloff and cost yourself more money.
Don’t buy calls on rips. This applies always, and even more so for a low-volume stock.
Watch out for stop loss hunts. It’s common practice for shorts to hunt for stop losses for cheap shares. DON’T SET STOP LOSSES - I like setting alerts instead, and letting myself make a call on what to do at that level.
Summary
RVP is priced like a value stock but growing exponentially. This is not hyperbole. Its revenue charts are exponential and it’s P/E is at historical lows. If revenue continues growing this means that RVP is really cheap. However, the market is treating RVP like a value trap, which it very well might be given that the federal contract currently expires in March 2022 (after being renewed/extended 3 times).
RVP provides a cheaper way to play the covid-19 future than buying Moderna or Pfizer. If you believe this pandemic is not going away and more vaccines are in our future, this is an easy investment.
There are significant downside risks due to low volume/liquidity and the high concentration of revenue from the federal government. The key risk for RVP is future sales do not hold up; however, $12M spent on production expansion and $10M spent on buybacks suggest that management is not worried about that eventuality.
The upside for RVP is multiple expansion, revenue growth, market share. BDX is a direct competitor that’s larger but growing much more slowly while having much lower net profit margins, and BDX trades at a 37 P/E while RVP is trading at a 9. It’s not unreasonable to see RVP being valued at $1B+ or getting acquired by a larger player with stronger customer relationships. $1B valuation puts the share price at $30/share.
Disclaimer: I am long RVP. I am sharing research and some thoughts on how I am thinking about trading. Trade your own way, do your own DD. I have no professional financial training and am not a financial advisor - u/Fataspirations
Disclaimer: We are long $VVPR, not investment advice, not a registered professional. You could lose everything, buy at your own risks.
2021-12-04 Burlap's Gambles
Author: u/fataspirations
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