EUR 850.00 For Business Accounts Only

Morningstar | Fresenius Shares Look Undervalued Despite Improving Fundamentals in 2019

As the preeminent leader in the global dialysis market, Fresenius boasts a narrow economic moat underpinned by scale-derived cost advantages that we think are likely to persist over time. A close second to peer DaVita in the U.S. market, Fresenius has an additional 1,400 facilities in international regions making it the single largest dialysis service provider globally. The firm has benefited from its vertically integrated structure, operating the world's largest dialysis products business, providing in-center hemodialysis machines, dialyzers, and concentrate, along with bolstering its home-based treatment options with the acquisition of NxStage Medical.While we remain cautious regarding the industrywide reimbursement outlook in the U.S., we think Fresenius' low-cost outpatient dialysis service operations will remain critical to patients with limited alternative options. Fresenius stands to benefit from additional consolidation should the combination of price and cost pressures encourage independent clinics to join the operations of a larger chain, given their lower breakeven rate requirements. While Fresenius' product business and broader international exposure insulates it to some degree from ongoing concerns related to patient assistance programs in the U.S., the industry could experience some near-term pain should recently proposed pieces of legislation go into effect. However, we think these risks should be considered in the context of an industry where we think low- to mid-single-digit volume growth will persist over the long term--a relatively rare characteristic among healthcare provider firms.Management's multi-year financial targets look a bit aggressive to us, but we think the firm is well positioned to grow revenue and earnings at a mid- to high-single-digit rate over the long term. While upside to earnings estimates could stem from outperformance on management's ongoing cost efficiency initiatives, we think this is more likely to maintain profitability in the face of inflation rather than be a source of incremental cash flow for investors.