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Masimo (MASI +4%) is making a strong move following news late Friday its board authorized management to evaluate a proposed separation of its consumer business. MASI also reaffirmed its Q1 and FY24 guidance. In addition, Politan Capital, an 8.9% shareholder, announced it is nominating two candidates for election to Masimo's Board of Directors. Joe Kiani is expected to remain Chairman and CEO of Masimo and Chairman of the newly created company.

• A little context here is helpful. Masimo basically has two business units: health care and non-health care. The health care side focuses on hospital monitoring products and medical technology products used in alternate care settings. The non-health care side is focused on consumer audio products mostly related to listening to music. This strikes us as an odd pairing, so maybe separating the two units does make sense.
• The health care side employs an attractive razor/razor blade business model that has very high renewal rates and very low churn. Masimo has a large install base at hospitals of monitoring technology that uses disposable sensors. As such, Masimo's main business is selling sensors to hospitals that feed into Masimo's monitoring equipment. Its largest product segment is pulse oximetry, devices that measure blood oxygen levels. MASI also sells monitoring equipment/sensors to measure oxygen in the brain, exhaled carbon dioxide, brain wave activity etc. This year, Masimo intends to launch a new hemodynamic monitoring system that will measure cardiac output.
• On the non-health care side, products include amplifiers, speakers, and hearables, which are headphones and earbuds. Masimo notes that its hearables category is the fastest-growing area, and it's a key focus. Its four major brands are Bowers & Wilkins, Denon, Marantz, and Polk Audio. Popular products are its Stork baby monitor and the Freedom smart watch.
• We do not think it is a coincidence that this separation is being proposed following a difficult year in 2023. On the Consumer side, Masimo has been hurt by a reduction in consumer discretionary spend, which has lowered demand for integrated home entertainment systems. Also, Consumer was lapping a robust 2022 when stay-at-home work was still driving a lot of upgrades for home entertainment.
• The health care side had its troubles as well in 2023. Masimo explained that hospitals are no longer monitoring all patients for potentially developing COVID. Hospitals are reverting back to normal practices of monitoring only the most relevant patients for blood oxygen levels. That transition depressed sales for its pulse oximetry sensors. In addition, Masimo cited elevated inventory at some customers, partly from overly enthusiastic buying during 2021-22. Most of these issues are now behind Masimo. As such, the company expects to get back on its normal growth trajectory in 2024 after it laps robust comps in Q1-Q2.

Overall, investors are clearly happy to see Masimo possibly on a path to separating its business units, which do not make a lot of sense being lumped together. We do not see a lot of synergies by coupling these two businesses together. The near term fundamentals look better on the health care side while its consumer side is being hurt by lower consumer discretionary spend. Investors are also happy to see an activist investor getting involved to spur changes.