Irvine, California-based Masimo Corp (US:MASI) finds itself embroiled in a heated proxy battle with holder Politan Capital, and the implications for the med-tech’s future are being closely watched by shareholders and industry observers alike.

Over the course of this month, the MASI stock price has plummeted 14.9%, as the battle between the two entities unfolds. The outcome of this proxy fight could significantly change Masimo’s corporate governance and strategic direction, but may also leave shareholders in better stead, according to the activist.

AGM Lead-up

This story began on May 1, when Politan Capital submitted a formal notice to present a stockholder proposal and nominate candidates for election to Masimo’s board of directors at the upcoming 2023 Annual Meeting.

In a letter sent to the board on May 23, Politan outlined its view that independent oversight and greater accountability are urgently needed on Masimo’s board. Politan, with a 9% stake in the company, emphasized the importance of change to fix Masimo’s broken corporate governance and unlock its potential for profitable innovation and growth.

Politan’s concerns stem from Masimo’s declining market value, undisciplined capital allocation, and an unfocused strategy that has severely depressed the company’s valuation. Masimo’s failed attempts to enter adjacent markets and missed cash flow and ROIC targets have raised red flags for Politan.

The company’s poor governance, exemplified by votes against directors and Say-on-Pay rankings, and controversial compensation practices have further fueled Politan’s call for change.

Under the Fintel Microscope

The tables and charts from Fintel’s financial metrics and ratios page for MASI stock provide useful insights, particularly on the underlying financial performance of the shares and what sort of management manipulation is going on.

At a first glance, we can see that MASI in recent years has sharply scaled up its revenue that is being generated from operations, almost doubling its sales to over $2 billion.

While operating income and net income have fallen in the quarters during this time, it can usually be a plausible excuse when a company is in “scale up mode”, reinvesting capital to further propel its operations.

However, when looking at Fintel’s management effectiveness table and chart, we can see almost all performance measures have been slowly tracking lower over the past five years.

Fintel’s proprietary OCROIC (operating cash return on investor capital) is a metric that was developed to show the true underlying operating performance of managers, without being manipulated over a longer term horizon with balance sheet tweaks.

A lower OCROIC may suggest that the company’s operations are not generating sufficient cash flows to justify the capital invested. It could indicate inefficiencies or poor capital allocation within the company.

In response to Politan’s criticisms, Masimo released a presentation on May 31, supporting its management team and defending its strategic approach. The company stressed the strength of its core pulse oximetry business, highlighting its sticky nature and recurring revenue from long-term contracts.

Management also pointed to secular tailwinds, such as the increasing demand for pulse oximeters and the trend towards using devices over nurses in hospitals.

In addition to the presentation, founder, CEO and chairman of Masimo, Joe Kiani disclosed buying more shares in the company on May 25.

The trades surfaced through Fintel’s insider trading report on MASI stock, revealing the 6,365 share purchase that occurred in three transactions with a total market value just over $1 million.

Swaying Votes

As the battle between Masimo and Politan intensifies, both parties have released competing presentations to sway shareholders’ votes ahead of the Annual Meeting on June 26.

Politan believes that its two nominees, Michelle Brennan and Quentin Koffey, have the skills, experience, and shareholder alignment necessary to address Masimo’s governance and strategic challenges.

On the other hand, Masimo urges its shareholders to vote for its highly qualified director nominees, H. Michael Cohen and Julie Shimer, Ph.D., emphasizing the risk Politan and its nominee pose to the company’s strategy and leadership.

Analyst Weigh In 

Following the early May financial update with Q1 numbers, Piper Sandler analyst Jason Bednar wrote that Politan has the potential to influence higher earnings but noted that the proxy fight was far from a guaranteed positive for shareholders.

The analyst thinks while the stock is trading higher in 2023, he maintains his ‘neutral’ rating on MASI stock and thinks that too much optimism was baked into the stock on the hopes of a potential victory against Apple.

Fintel’s consensus target price of $199.34 suggests analysts think MASI’s share price could rise 28% over the next year.

Seeking Refocus

Politan’s activist stance argues for greater oversight, accountability, and a refocused strategy to unlock shareholder value. CEO Kiani maintains his confidence in its management team and board, emphasizing the potential for continued strong returns and the need for stability in leadership.

As the battle plays out, investors and industry participants await the outcome, recognizing that activism can indeed drive positive change for companies in need of rejuvenation. However, the question remains whether Politan’s proposed changes would be a disruptive force or a catalyst for unlocking Masimo’s true potential.

This article originally appeared on Fintel

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