Masimo To Negotiate Lower Royalties From COV Post 1Q11, Bets Citigroup

Citigroup has published a research report on Masimo Corporation MASI after the company encouraged the Street to remove COV's royalty stream post 1Q11, and Citi believes a lower royalty rate will most likely be negotiated. In the report, Citigroup writes "The covenant requires COV to pay royalties through 3/14/11 for US-based pulse oximetry sales. The royalties have generated >50% of MASI's earning's since 2006. MASI can't sue for infringement of these patents as long as the payments continue. We believe a renegotiation would require a steep cut to the current 13% rate and assume 5% as the likely outcome. We remain skeptical that MASI can deliver on 2011 and 2012 Street EPS if COV stops paying the royalty. Hence, we believe an agreement of at least 5% is needed for the stock to hold at current levels as fundamentals (i.e., US hospital admissions) remain challenged." Citigroup maintains its Hold rating and $29 price target. Masimo Corporation closed yesterday at $28.23.