AVNS stock intrinsic value fair value estimate & owner earnings analysis

Avanos Medical (Alpharetta, Georgia) makes medical devices in two segments. Specialty Nutrition Systems (about $433M of 2025 sales) sells MIC-KEY and Corpak enteral feeding products, plus NeoMed neonatal feeding products and, since September 2025, Nexus TKO needleless connectors. Pain Management and Recovery (about $238M) sells ON-Q and ambIT pain pumps, Game Ready cold-compression systems and radiofrequency ablation products such as COOLIEF. Sales were $701M in 2025, up 2% from 2024. Growth came from the nutrition segment (up 9%) and radiofrequency ablation (up 10%), while surgical pain products fell 8.5%. About 78% of sales are in North America. What we measure. We value the business on owner earnings: operating cash flow, less swings in receivables, inventories, payables and accruals, less stock-based compensation (a real cost), less only the capital spending needed to keep the business running. On that basis Avanos earned about $0.23 per share in 2025, $0.75 in 2024, $0.36 in 2023, $1.76 in 2022, $0.61 in 2021 and $0.65 in 2020. We use the median of those six years, about $0.63 per share (roughly $29M a year). 2022 is the outlier because the company then still owned the respiratory health business it later sold, and a large inventory build was reversed. We left the series as reported rather than trimming it. Trailing owner earnings fell about 69% in 2025, so we do not assume an immediate rebound to the median. In 2025 the company took $32.4M of restructuring charges after selling the respiratory business, and it says it expects up to $10.0M more in 2026 (mostly severance) as a new CEO reshapes the organization. Cash capital spending of $31.6M was also above the roughly $18M of 2023 and 2024, partly because $5.6M of 2024 spending was still unpaid at the end of that year. For that reason our base case starts 2026 at about $0.46 per share and returns to $0.63. Amortization and impairments. Acquired intangibles are amortized at about $19M a year, and the company wrote off $77.0M of goodwill and intangibles in 2025 and $436.7M in 2024. Those charges are non-cash and are already excluded from cash flow. Because acquired product franchises do wear out, and because repeated write-downs show past acquisitions have not earned their price, we give no growth credit and let earnings decline after year ten in the base case. We did not lower the earnings level itself, which would charge the same decay twice. Base case, about $7.50 per share. Owner earnings of $0.46 in the first year, then $0.63 a year for nine more years, then a 5% annual decline. We credit no growth. Nutrition sales have grown 5% to 6% a year in the last two years and radiofrequency ablation faster, but that depends on continued demand and adoption, and the company's targeted $15M to $20M of annual savings from restructuring is a management target. We left both out. What supports the level is a business that has earned positive owner earnings in each of the six years we measured, sells recurring disposable products, and grew segment operating income from $76.5M (2023) to $91.8M (2025). Bear case, about $2.60 per share. Owner earnings stay at about $0.25 (near 2025's $0.23) for ten years and then decline 10% a year. This reflects named risks: the restructuring savings do not appear; surgical pain sales keep shrinking (down 8.5% in 2025); the 'Corporate and Other' revenue line, which fell from $74.4M to $30.5M in two years, keeps winding down; sales to distributors are concentrated (McKesson 18% and Medline 17% of 2024 sales, Medline 12% in 2025); manufacturing is concentrated in Mexico, exposed to tariffs the company lists as a risk; and more acquisitions are written off. The company has $100.8M of term debt due in 2027 at 5.79%, which is manageable against operating cash flow but must be refinanced. Bull case, about $14.50 per share. Owner earnings of $0.90 in the first year, roughly 2025's cash flow before the one-time restructuring costs, then 3% annual growth for ten years, less than the segment growth of the last two years, followed by a 3% annual decline. This requires the restructuring to finish on the 2026 timetable and nutrition and ablation growth to continue. What could make this wrong. Owner earnings have been volatile ($0.23 to $1.76), so the median may not describe the next decade. The 2020 to 2022 figures include the divested respiratory business, and two large distributors account for a large share of sales. We could not fully separate one-time cash outflows from recurring ones inside the 'deferred income taxes and other' line of cash flow (about $10M to $39M of outflows each year 2023 to 2025), so we left them in, which lowers our estimate. We use no cash add-on or debt subtraction, since owner earnings are already after interest. Margin-of-safety price. The margin-of-safety price is about $4.50, roughly 40% below the base case and under twice the bear case. The margin reflects the volatile earnings history, repeated write-downs and a restructuring still under way.