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Morningstar | Fresenius Medical Care and Fresenius SE Both Preview Weaker-Than-Expected 2019 Outlook

Both Fresenius Medical Care and Fresenius SE previewed outlooks for 2019 below our expectations while also abandoning previous 2020 performance targets. While we had already assumed each company’s 2020 targets were unrealistic, the guidance for 2019 does fall short of our projections. We therefore anticipate modest reductions to our fair value estimates for both companies, but the recent sell-off in shares seems overdone, in our view. We don’t foresee dramatic changes to our longer-term assumptions or our narrow moat ratings for either company.

Fresenius Medical Care expects roughly flat net income for 2019, which is lower than we expected. Following the divestment of Sound, the upcoming year will face a number of business integrations, including NxStage, and increased investment in home dialysis. Since underlying growth in the dialysis business should remain stable, we imagine a portion of these costs will be transitory.

Fresenius SE also outlined performance falling short of our expectations in its Kabi and Helios segments, where expected headwinds look more problematic than we originally anticipated. While we share management’s view of mid-single-digit growth for Kabi, management expects slower segment earnings growth thanks to tough comps in the U.S. generic injectables market and necessary business investments, including biosimilars. Since we already model modest margin erosion for Kabi, we don’t expect to dramatically shift our outlook for this business. Helios has been the biggest surprise to us, however, thanks to reimbursement pressure and recent nurse staffing regulation in Germany. These factors, combined with fewer hospital roll up opportunities in the region, have led to the Germ operations dragging on performance despite stable results within Quironsalud’s Spanish business. Management therefore expects a low- to mid-single-digit decline in this segment’s results for 2019, considerably below our forecast.