Nanosonics (ASX:NAN) share price sinks 7% on broker downgrade

This broker just became bearish on Nanosonics…

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The Nanosonics Ltd (ASX: NAN) share price has come under pressure on Wednesday morning.

At the time of writing, the infection prevention company’s shares are down 7% to $5.01.

Why is the Nanosonics share price sinking?

The catalyst for the weakness in the Nanosonics share price today has been a broker note of Goldman Sachs.

According to the note, Goldman has downgraded the company’s shares to a sell rating and cut the price target on them to $4.93.

Based on the current Nanosonics share price, this implies potential downside of 1.5% following today’s decline.

Why did the broker downgrade its shares?

There are a few key reasons why Goldman Sachs believes the Nanosonics share price is now overvalued. These include its slowing sales, a shallower than expected growth recovery, and the lack of a game-changing product launch.

Goldman explained: “Whilst financial/operating conditions across the US hospital channel have markedly improved, we increasingly believe NAN will be unable to recover the hardware deficit in full (we estimate +4.8k units in FY20-21E vs. initial expectations of +6k)”

“More recent data points suggest the recovery in elective procedure volumes is lagging expectations […]. We believe the biggest risk to a Sell thesis in NAN is a material, successful product launch. However, we also believe that the probability of this occurring in the near term has been reduced by last week’s launch of AuditPro,” it added.

This has seen the broker make meaningful downward revisions to its sales and earnings estimates through to FY 2023, which ultimately led to the downgrade to a sell rating.

Goldman commented: “Overall, we reduce FY21-23E sales/EBITDA/EPS by an average of (14)%/(30)%/(32)%, driving a (10)% downgrade in our 12m Target Price to A$4.93, which implies an -8% potential return, vs. a median +3% for our coverage. We now forecast (21)% below consensus EBITDA in FY21E and (35)% below in FY23E. Downgrade to Sell from Neutral.”

Competitive risks

Goldman Sachs also has concerns over competitive risks from new technologies.

It explained: “Looking forward, we believe NAN is exposed to an intensification of competitive risks, such as: i) continued growth of alternative approaches (e.g. UV-C based HLD); ii) NAN expects to soon be operating beyond ultrasound probes (i.e. facing new competitive dynamic which we cannot yet assess); iii) handheld ultrasound could continue to take share from the conventional market (i.e. which could present opportunities/risks).”

It notes that UV-C based HLD is a disinfection method that uses short-wavelength UV light to penetrate the cell walls of microorganisms. Once the light is absorbed by the nucleic acids within the microorganisms, the microorganisms become inactivated or killed.

While Nanosonics’ trophon technology may have better efficacy, the costs and processing time of UV-C based HLD is much lower. As a result, it fears that the “value proposition may be skewed more to convenience than efficacy.”

The Nanosonics share price is now down ~40% since the start of the year.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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