ELMD — Electromed, Inc. · 2026-09-04 · Verdict: WATCH · Conviction 3
Price $27.61 (screen row, universe_under2b.csv, screen dated 2026-09-04; no live prices available) · Mkt cap $231.0M (8,366,163 shares) · EV $210.5M · EV/EBIT 15.2x on FY26 EBIT (screen said 21.5x on stale FY25) · FCF yield 3.6% actual FY26 (screen said 4.9%) · Net cash $20.45M, no debt · ADV $3.6M
Sources read: 10-K filed 2026-08-25 for FY ended 2026-06-30 (Items 1 and 7; the bundle's split missed Item 1A, per meta.json), 10-Q 2026-05-12, DEF 14A 2025-09-30, 8-Ks 2026-05-12 and 2026-08-25 with exhibits 99.1 to 99.3, 12 months of Form 4s. No transcript in the bundle, so quotes come from release and presentation exhibits.
1. What the business actually does
Electromed makes SmartVest, a high frequency chest wall oscillation device: a generator, a hose and an inflatable vest that shakes mucus loose in damaged lungs. It is prescription-only and sold direct to the patient rather than through a home medical equipment distributor, so Electromed takes the pulmonologist's referral, does the insurance paperwork itself, ships the device and trains the patient at home, capturing both manufacturer and distributor margins (10-K FY2026, Item 1). Hence a 78.5% gross margin. Homecare is 94% of FY26 revenue; its payer mix is 48% Medicare, 50% commercial, 2% Medicaid, and 76% of referrals are bronchiectasis patients (8-K 2026-08-25, EX-99.2). All of it bills under one Medicare code, E0483, allowable about $16,000. 197 employees, 58 field reps, one Minnesota plant.
2. Why it is mispriced: the edge case
The screen row is a year stale in both directions. On FY25 numbers it shows 21.5x EV/EBIT and a 4.9% FCF yield; on the FY26 results filed 2026-08-25, EBIT of $13.881M makes it 15.2x, but free cash flow of $8.4M makes the yield 3.6%, worse than the screen thinks. The stock is 40.4% off its high, and insider filings date part of that fall: tax withholdings priced at $42.30 on 2026-06-30 and $27.10 on 2026-09-01 (Form 4s 2026-07-02 and 2026-09-03), a 36% decline across a stretch in which the company reported record results.
I cannot honestly name a forced or indifferent seller. This is not an orphan: it trades $3.6M a day against a $231M cap and its own Q3 release cites beating "consensus expectations" (8-K 2026-05-12, EX-99.1). Two reasons for the de-rating are legitimate. Q4 revenue growth was 11.6% against 18.4% in Q3, homecare decelerating from 18.6% to 15.2% (8-K 2026-08-25, EX-99.1; 10-Q 2026-05-12); and on the day of the record print the CEO announced retirement effective on or about 2026-04-02 (8-K 2026-08-25, Item 5.02). The edge is multiple compression on a business whose operating profit rose 43.7%, not proof that anyone is selling for a non-fundamental reason.
3. Unit economics and growth
FY26 revenue $73.776M, up 15.3%; homecare $66.612M, up 16.3%, of which $7.959M was volume and $1.366M higher net revenue per approval (10-K FY2026, Item 7). SG&A grew 8.7% against 15.3% revenue growth, which is the whole operating leverage story: operating income $13.881M, up 43.7%, margin up 370bp to 18.8%; diluted EPS $1.30. Rep productivity of $1,145,000 beat the company's $1.0M to $1.1M target, and over five years operating income went from $3.1M to $13.9M (8-K 2026-08-25, EX-99.1 and EX-99.2).
Cash quality is the problem. Operating cash flow fell to $9.665M from $11.393M despite net income rising 50%, because receivables grew $5.145M to $29.805M. Some is structural, since patients pay over one to 13 months (10-K FY2026, Item 1), but receivables grew 20.9% against 15.3% revenue growth and days sales outstanding went from 141 to 147, so growth consumed most of the incremental profit. Against that $9.665M sit $2.722M of stock compensation and $1.252M of capex.
4. Balance sheet and capital allocation
Confirmed clean: $20.450M cash, no debt, $45.146M working capital and a $10M revolver undrawn at 2026-06-30 (10-K FY2026, Item 7). The screen's debt_note warned net cash was unverified because no long-term debt was tagged; the filings confirm there is none.
Buybacks look better than they are: $10.000M spent in FY25 and $3.918M in FY26, yet shares issued and outstanding rose from 8,349,176 to 8,366,163 (8-K 2026-08-25, EX-99.1), so two years and $13.9M bought a flat share count, with weighted diluted shares down 2.5%. Insiders and directors own 10.5%, and a 7.2% holder, former director Stephen Craney, owns a parts supplier paid $1,377,000 in FY2025 (DEF 14A 2025-09-30). Trailing Form 4s show zero open-market purchases against 61,501 shares sold for $2,202,390, though every sale was paired with a same-day option exercise (Form 4s 2026-05-19, 2026-06-08, 2026-06-09).
5. Management: what they said versus what they did
The FY2025 bonus plan set target revenue growth of 12.4%; actual growth was 17.0% and the payout was 156% of target (DEF 14A 2025-09-30). The deck says the company "expects 78% gross margins to continue improving" and margin went 78.1% to 78.5%. This team hits what it promises. It also issues no forward revenue guidance in any document here, so the assumptions below are mine, not theirs.
6. Valuation
A ten-year discounted cash flow assuming a 24% tax rate, capex equal to depreciation, incremental working capital of 35% of incremental revenue, and margin drifting from today's 18.8%: base (10% revenue growth, 20.5% margin, 10% discount) $32.04 per share, +16%; bear (4% growth, 17% margin, 11% discount) $16.96, -39%; bull (14% growth, 23% margin, 9.5% discount) $50.85, +84%; and a case where CMS cuts the E0483 allowable, growth stops and margin falls to 10%, about $9.32. Weighted 45/22/25/8 that is $31.61, roughly 14% above the price.
Reverse DCF: at $27.61 the $210.5M enterprise value implies about 7.5% revenue growth for a decade on those same assumptions, under half the 15.3% just delivered and below the roughly 8% growth the company attributes to the US HFCWO market (10-K FY2026, Item 1).
7. Catalysts and timeline
The September quarter, normally reported in early November, is the one that matters: it shows whether Q4's deceleration to 15.2% homecare growth was a stumble or a trend, and whether receivables stop outrunning revenue. Then CEO succession before April 2027.
8. Risks and pre-registered kill criteria
One product class, one billing code, 48% of homecare revenue from Medicare: a fee schedule cut is the whole thesis. Insmed's Brinsupri, approved for bronchiectasis in 2025, competes for the same patient budget, and Baxter, Philips and Tactile Medical sell rival devices (10-K FY2026, Item 1). Every US homecare unit carries a lifetime warranty against a reserve of $1.899M.
- Homecare revenue growth below 10% year over year for two consecutive quarters.
- Days sales outstanding above 160 at a quarter end, or receivables growing faster than revenue for two more quarters.
- Any CMS reduction to the E0483 allowable amount, or a reported year-over-year decline in net revenue per approval.
- Operating cash flow below net income for a second consecutive fiscal year.
9. Verdict and one-paragraph summary
WATCH, conviction 3. The screen misprices Electromed in both directions: on the FY26 results filed August 25 it trades at 15.2x EBIT rather than 21.5x, with confirmed net cash of $20.5 million and no debt, after five years in which operating income went from $3.1 million to $13.9 million on 78% gross margins and fifteen straight quarters of revenue and profit growth, and the price embeds only about 7.5% growth for a decade against the 15.3% just delivered. What stops it being an IDEA is that the 40% fall has explanations rather than a seller: homecare growth decelerated from 18.6% in the March quarter to 15.2% in the June quarter; receivables grew 20.9% against 15.3% revenue growth, so operating cash flow fell to $9.7 million from $11.4 million while net income rose 50%, making real free cash flow a 3.6% yield rather than the screen's 4.9%; and the CEO announced retirement on the day of the record print with no successor named. My probability-weighted value is $31.60 against $27.61, too little margin of safety for a single-product company whose revenue rests on one Medicare billing code. The September quarter, due in about two months, settles both open questions at once.
Research for discussion, not investment advice. Positions and sizing are the reader's decision.