Tactile Systems Technology Inc: Why This Small-Cap Health-Care Stock Could Rally 50%

TCMD StockTactile Systems Technology Stock Chart Shows Strong Upside Prospects

The COVID-19 pandemic has led to renewed interest in health-care stocks. But even after the pandemic fades, I  feel that demand for the health-care sector will continue to be high, especially as the population ages.

In the medical devices segment, take a look at Tactile Systems Technology Inc (NASDAQ:TCMD), a developer of at-home therapy devices used to deal with chronic swelling diseases.

TCMD stock traded as high as $71.65 in December 2019 and around $60.00 prior to the sell-off in March. The stock has rallied about 30% from its low but remains down 40% this year, which presents a contrarian opportunity.

A look at the Tactile Systems Technology stock chart below shows the breakdown in February and March. The stock staged a strong V-shaped rally to a resistance level at $55.00 but failed to break and hold.

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Following the failed breakout attempt, TCMD stock entered a steady downtrend, breaking below $45.00 and then $40.00.

Tactile Systems Technology stock recently managed to break above trendline resistance and is currently hovering above its 50-day moving average (MA) of $36.30 and just below its 200-day MA of $42.58.

Chart courtesy of StockCharts.com

The TCMD stock chart shows a favorable risk/reward scenario. A sustained break could see the stock retake $55.00, $65.00, and $70.00.

Longer-term Prospects Look Promising for TCMD Stock

Tactile Systems Technology Inc has been a story of consistency.

The company delivered four straight years of double-digit revenue growth, to a record $189.5 million in 2019. The compound annual growth rate (CAGR) during this time frame was an impressive 28.8%.

Fiscal Year Revenues (Millions) Growth
2015 $68.9 N/A
2016 $84.5 22.8%
2017 $109.3 29.3%
2018 $143.8 31.5%
2019 $189.5 31.8%

(Source: “Tactile Systems Technology Inc.” MarketWatch, last accessed November 19, 2020.)

But given the uncertainties of the pandemic, analysts estimate that the company will see a slight revenue decline of 1.8% to $186.1 million this year, followed by a bounce of 23.6% to a record $230.0 million in 2021. (Source: “Tactile Systems Technology, Inc. (TCMD),” Yahoo! Finance, last accessed November 19, 2020.)

During the last five years, Tactile Systems Technology delivered positive earnings before interest, taxes, depreciation, and amortization (EBITDA).

Fiscal Year EBITDA (Millions) Growth
2015 $4.3 N/A
2016 $5.1 18.5%
2017 $5.8 13.3%
2018 $6.6 15.3%
2019 $15.1 128.5%

(Source: MarketWatch, op. cit.)

The company reported four consecutive years of profits based on generally accepted accounting principles (GAAP), with strong annual earnings-per-share (EPS) growth.

Fiscal Year GAAP Diluted EPS Growth
2015 -$0.03 N/A
2016 $0.15 672.5%
2017 $0.11 106.7%
2018 $0.14 10.4%
2019 $0.56 63.2%

(Source: MarketWatch, op. cit.)

The pandemic has resulted in lower expectations. It’s estimated that Tactile Systems Technology Inc will report a loss of $0.42 per diluted share this year but rally back toward earnings of $0.44 per diluted share in 2021. (Source: Yahoo! Finance, op. cit.)

The company delivered positive free cash flow from 2015 to 2018, prior to delivering a negative reading in 2019.

Fiscal Year Free Cash Flow (Millions) Growth
2015 $1.2 N/A
2016 $6.3 446.6%
2017 $0.5 -92.9%
2018 $4.8 981.4%
2019 -$2.9 -160.9%

(Source: MarketWatch, op. cit.)

Meanwhile, a strong financial position will allow Tactile Systems Technology time to recover from the pandemic. The company has strong working capital, with debt of $21.9 million and cash of $42.2 million. (Source: Yahoo! Finance, op. cit.)

Analyst Take

Tactile Systems Technology stock has the ability to go much higher, considering its price deterioration.

While TCMD stock trades at 100 times its consensus 2021 EPS estimate, the company’s pathway to stronger revenue and profitability is attractive.

For longer-term investors, Tactile Systems Technology Inc could provide above-average price appreciation.