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Morningstar | Getinge's 3Q Results Show Continuation of Strong Growth on Weaker Margins; Maintaining FVE

No-moat Getinge reported another quarter defined by encouraging revenue growth but deteriorating margin performance. That said, we're comfortable with our longer-term cash flow projections, and we don't intend to change our SEK 94 fair value estimate after incorporating third-quarter results.

Organic sales growth of 7.2% for the quarter and 6.2% year to date far outpaced our expectations for full-year performance close to the low end of management's reiterated 2%-4% target. While this range now appears too conservative for the year, we're not comfortable taking up our longer-term growth forecast just yet. Gross profit dollars have held steady year over year, but adjusted gross profit margin has declined to the tune of roughly 500 basis points. While currency fluctuations likely account for approximately 75 basis points of the reported decline, the bulk is attributable to product and market mix that we don't anticipate will reverse in the near term. Higher growth out of emerging economies and the company's capital goods portfolio combined to account for the majority of the gross margin weakness that's been consistently apparent across all three business segments thus far in 2018.

On a positive note, Getinge's operating cost structure seems to have finally found some stability, with its expense base roughly flat versus the year-ago period after adjusting for currency effects. This is of critical importance to our longer-term assumptions, as we forecast adjusted operating margin finding a bottom near 10% for the full year. Management indicated that remediation activities in the U.S. should largely be complete by year-end, which provides some support for our view that companywide operating margin should trend positively in 2019. We're hopeful that our cautiously optimistic longer-term view on the business will be validated at management's upcoming analyst day on Nov. 21.