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Morningstar | Fresenius SE’s 4Q Results and 2019 Outlook Confirm Our Undervalued View

Following Fresenius SE’s recent lowered performance expectations in December, the company’s fourth-quarter results slightly exceeded our estimates. Furthermore, the company’s guidance for 3% to 6% revenue and roughly flat constant currency revenue and net income growth, respectively, for 2019 lines up with our expectations. Management’s expectations of annualized organic 4% to 7% revenue growth and 5% to 9% net income growth between 2020 to 2023 also match our overall forecast. We don’t anticipate a change to our fair value estimate for the company, and this quarter’s results confirm our view that shares look undervalued following the recent sell off. While Fresenius SE still faces some ongoing challenges in the Helios division and tougher comps for Kabi, we still think the company’s diversification and stable business lines support the firm’s narrow moat.

Despite margin pressure from depressed reimbursements and rising costs, Fresenius Medical Care’s dialysis operations continue to largely track our expectations with 6% organic growth during the quarter. The NxStage acquisition should add a higher growth business line following Federal Trade Commission approval contingent upon selling the target’s bloodline tubing product line. See our separate Fresenius Medical Care note for a more detailed analysis of the company’s performance.

Management’s outlook for 3% to 6% top- and bottom-line growth for Kabi in 2019 also looks consistent with our expectations. During the quarter, Kabi reported 7% organic growth with a slight expected decline in margin thanks to investment in the biosimilars pipeline. New product launches and limited pricing pressure from drug shortages in the U.S. should uphold this segment’s performance even though it faces increasingly tough comps. Asia remains a key area of strength for this business, and biosimilars should contribute to growth over time, including the likely launch of biosimilar Humira in Europe later this year.

Lastly, Helios remains the main weak spot for Fresenius SE, with management guiding a 2% to 5% decline in operating profit for 2019. Although this business will face previously discussed regulatory, pricing, and staffing issues that will weigh on profitability, we think management’s efforts to stabilize the business along with favorable results in the Spanish operations will keep segment profit declines on the low end of the outlook range.