EUR 850.00 For Business Accounts Only

Morningstar | Fresenius Announces 3Q Results and Lowers Full-Year Guidance; No Change To FVE

Fresenius Medical Care announced third quarter results that were marginally below our forecasts and reduced full-year guidance, which now places expected revenue and net income for fiscal 2018 more squarely in line with our full-year estimates. We'd been marginally below management's prior outlook in our projections, primarily due to our view that 5%-7% consolidated revenue growth was more a best-case, rather than a base-case, expectation. While management's projections for the year are now somewhat below our longer-term expectations for 4%-5% growth on the top line, we plan on leaving our estimates in place for now. We're maintaining our narrow moat rating and EUR 81 per share fair value estimate, or $48 per ADR, which implies an enterprise value/EBITDA multiple near 9.3 times our unchanged estimates for 2019.

While there are many crosswinds affecting Fresenius this year including the mid-year divestiture of Sound Physicians, FCPA-related settlement charges, incremental lobbying efforts against the upcoming California ballot initiative, and the implementation IFRS 15, we view the bulk of these headwinds as truly one-time in nature. As we parse through the announced figures, we think the important metrics to pull out are constant currency revenue growth at approximately 3% year over year, comparable operating income growth of 4%, and comparable net income growth of nearly 19%, driven almost entirely by U.S. tax reform. Management's updated outlook revised down its revenue growth forecast to 2%-3% in constant currency, from 5%-7% previously, and its comparable net income growth forecast to 11%-12%, down from 13%-15%. Excluding the effects of U.S. tax reform, net income is now projected to grow in line with revenue, versus prior expectations that implied modest profit margin expansion on a year-over-year basis. All this said, we're encouraged that the firm's underlying operating margin appears to be approximately flat compared with last year's results.

We view shares as fairly valued today, but would be more constructive on the stock should investors get an opportunity to buy shares at a discounted valuation. It's hard to read too much into these results without a detailed discussion of the underlying drivers, and all we know today is that the firm's dialysis services business has been weaker than anticipated. We'll await the more in depth figures in the firm's full quarterly release slated for Oct. 30 before updating our model.