EUR 850.00 For Business Accounts Only

Morningstar | Getinge Reports Strong Sales Growth Year to Date, but Margin Performance Continues to Underwhelm

No-moat Getinge announced encouraging second-quarter results, posting its second consecutive report with mid-single-digit organic revenue growth. We plan to raise our fair value estimate to SEK 98 per share from SEK 95 to account for this better-than-anticipated pace of growth, along with the recognition of cash flows received to date. That said, while the operating cost pressures seen in the first quarter have moderated to a large extent, gross margin weakness appears to have taken its place. This has been largely related to currency and mix, as the lower-margin life sciences and surgical workflows segments have shown outsize growth year to date, growing nearly 8% on a combined as-reported basis versus the 1.4% seen in higher-margin acute-care therapies.

Management appears to be delivering thus far on at least a portion of its guidance, namely revenue growth more convincingly within its 2%-4% longer-term range. Our updated model places our 2018 estimates nearer 2%-3% versus our prior expectation for growth at or below the bottom end of the range, closer to a 1.5%-2% rate. We continue to view the second aspect of guidance, 10% earnings per share growth, to be much more difficult for the business to achieve in the near term. Considering the better-than-expected revenue performance thus far in 2018, its surprising to see management's measure of adjusted EBITA down nearly 30% over the first half of 2017. This underscores our negative moat trend rating. Furthermore, while not explicitly incorporated into full-year guidance, management discussed the potential need for incremental operating investments in the second half of the year to support ongoing remediation activities and the sales organization in the firm's Asia-Pacific region. As a result, we lack the confidence to model material margin improvements in the near term and leave our forecasts unchanged; we expect full-year operating margin to fall slightly below the levels seen last year.

Management previously announced a settlement with one of Brazil's regulatory authorities, amounting to SEK 276 million of the SEK 419 million provision taken earlier this year and in 2017. Negotiations with other bodies are ongoing and should be wrapped up by the end of the year, with this specific fine expected to be paid in the fourth quarter. While it's difficult to parse the risk related to additional settlements in excess of the remaining provision, we'd note our high uncertainty rating on shares and emphasize a sizable margin of safety before considering initial investment.