First impressions

Corin‘s a likely candidate for the Thrifty 30. It makes a product we should need in ten years time, in fact we should need more, and it looks unambiguously cheap.

It makes orthopaedic devices like hip and knee implants, and the market values the company at less than tangible book value. It fell from grace in 2008, when, according US sales of its Cormet hip resurfacing system failed to live up to expectations. 

But I don’t feel the characteristic enthusiasm I normally feel in the early stages of a bargain hunt, untainted by fear because I don’t yet know why the shares are so cheap.

There’s a lot of metal in the pictures that alternate on the Corin home page and there’s increasing evidence metal on metal hip replacements fail more readily, and leave patients with more pain, than alternatives (also supplied by Corin).

On Tuesday morning Ashley Blom, a professor of orthopaedic surgery and co-author of a study published in the Lancet, said he would not want a metal hip replacement on the Today programme. I was listening because a friend may have a hip replacement, but I was also wondering whether Corin backed the wrong material. It looks like it did..

Cormet, for example, is:

The original, modern, metal on metal hip resurfacing

And the first paragraph of Corin’s preliminary results statement released last week highlights a strategic shift away from metal-on-metal. The company says sales of new hip products are more than compensating for lost metal-on-metal sales because metal-on-metal only accounts for 5% of sales as opposed to 40% five years ago.

With a new range of hip products, and a new knee system to be launched in 2013, Corin’s in transition, and maybe its troubles are in the past.

It’s up against Smith & Nephew though, and I think of Smith & Nephew as half a hidden champion. One half of Smith & Nephew makes orthopaedic implants like Corin. The other half is the hidden champion.

Corin, and Smith & Nephew, are competing with real behemoths: Stryker, Zimmer, Biomet and DePuy (owned by Johnson & Johnson). Judging by its profitability, Corin seems to be in all their shadows.

Though the implant business is superficially attractive because there seems to be no alternative to hip replacement for increasing numbers of people, it requires heavy investment which may be undone if implants prove to be less efficacious, or safe, than than initially claimed. Sales of the LARS ligament augmentation system, which Corin distributes, are also falling after high profile failures in elite athletes.

There are many reasons for nervousness even without considering austerity healthcare budgets.

But, according to data from Sharlockholmes the shares cost 0.9 times tangible book value, the company’s assets are 66% funded by equity, and its F_Score is 9 out of 9, so judging by the numbers, negative sentiment has dealt us a classic recovery stock.

That F_Score may be buoyed by unusually high sales of its new hip products, Trinity, Metafix and MiniHip, as a major new customer, MAKO, stocks up.

I’ll check the numbers and re-visit the story when the Corin publishes its annual report in April.