Enovis Corp (NYSE:ENOV) is an awful business, but that’s not really the point. In this short thesis, we focus heavily on accounting irregularities at ENOV, and there are a lot. Some of them are simple and some of them are complex. We review each in painstaking detail, and then make measured, common-sense adjustments to ENOV’s reported numbers to represent what is really happening in the financials of this business. Most of these adjustments are self-evident once you understand what ENOV did to necessitate them; only a few require much discretion as to magnitude.
We expect that after reading this analysis you will agree with our view that ENOV has been making a concerted effort for many years to inflate its organic revenue growth and profits, and that a decade of aggressive M&A was the primary vector for most of this puffery. But a huge deal has loaded ENOV with massive debt,i and its long, fun decade of hyperactive M&A has ended. If this story were a movie, we’d call it Last of the Acquisitions, and we’d have seen it many times:
When Matt Trerotola took the role of CEO ten years ago, this company was called Colfax. It was a boring but profitable industrial business with limited competition and a moderate level of debt. Mr. Trerotola brought with him a massive, expensive reimagination of this company: divestitures of all its industrial businesses, large and small acquisitions of health care businesses, 10 years of serial “restructuring,” even a name change. The result? Enovis: a money-losing health care business with a lot of competition, now levered to the gills.
Incredibly, for ten years straight, Mr. Trerotola was able to keep ENOV from missing quarterly EPS by so much as a penny even once.ii Pulling this off impressed analysts, and ENOV today enjoys nearly universal Buy ratings from the sell-side. Its EV/EBITDA multiple is close to that of much-higher-quality peers. But what impresses us most is that ENOV has convinced these analysts that its organic growth rate is 6-10%. Mr. Trerotola resigned last quarter, a year after squeezing the last bit of juice out of the roll-up strategy with that “last, big deal.”iii Textbook.
We now direct your attention to reality.
Executive Summary Of Key Opinions:
The following opinions comprise the core of our short thesis:
- Organic growth is nowhere near the claimed 6-10%, but rather 2% (and adjusted for inflation, zero)
- Earnings are inflated by aggressive accounting, bizarre and recurring non-GAAP exclusions, classification differences vs. peers, and…time travel? Adjusted EBITDA should be deflated ~60%
- Being a serial acquirer is what has allowed most of the obfuscations above
- ENOV’s debt has reached an unprecedented level that will prevent substantial future M&A, exposing both its lack of organic growth and its puffed-up earnings
- In the short run, ENOV will miss and reset below Street consensus. FY25’s expectations are back-end loaded, while FY26’s are absurd
- ENOV is a classically terrible business. In the long run, it will continue to generate negative FCF, as it has done in aggregate for 20 years under many different owners and managers
Investors’ chronic mismodeling of organic growth has been a harmless offense until now. However, the disparity between reality and fantasy will shortly become clear, because large M&A is no longer affordable:
Without more M&A, ENOV’s entire façade falls apart. Organic growth becomes the only growth, opportunities for aggressive accounting disappear, and fundamental problems like chronic cash burn, net losses and balance sheet weakness come back into focus. This type of thesis usually starts to play out around the one-year anniversary of the last, biggest acquisition because the corporate credit card has been maxed out and organic growth issues become much harder to bury. ENOV bought Lima in Q124; ENOV’s 57-year-old CEO resigned in Q125.
Adjusted EBITDA is a flattering metric to begin with, but ENOV’s is uniquely audacious. Removing ENOV’s worst irregularities, gimmicks, recurring costs, etc. gets Adjusted EBITDA closer to something realistic:
Technical and regulatory issues enhance the short opportunity here. Sector specialists covering ENOV don’t have a long history with the company, as it was a multi-industrial conglomerate covered by a completely different set of analysts until only recently. Wall Street is complacent, with ten Buy ratings and no Sells from the sell-side, and easy borrow. And of course, an EPS miss would be a shock after 10 years of this:
Read the full report here by Jehoshaphat Research
