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Morningstar | Weakening Profitability Trends at Getinge Seem To Be Moderating, but We're Not Yet in the Clear

No-moat Getinge reported results that we think were generally consistent with expectations, characterized by organic revenue growth in line with management's 2%-4% longer-term target and decelerating margin declines. As we roll and update our model, we don't anticipate making many changes to our longer-term projections or SEK 94 per share fair value estimate.

Organic sales in the quarter were up 2.4%, growing 4.9% for the full year. Following the impressive year-to-date performance as of the firm's third quarter, it seemed likely the business would surpass the 2%-4% target for the year. However, management set 2019 expectations again at 2%-4%, roughly consistent with our model and the current consensus outlook.

While gross and operating profitability improved sequentially versus the third quarter, both were still down modestly year over year. This was largely attributable to product mix, as capital sales grew at approximately 2 times the rate of consumables over the course of the year and currency--not a bad result for the firm, everything considered. Further, there are some bright spots in the company's management of operating costs. Adjusted operating expenses have remained largely flat over the course of the last four quarters, and the firm's overall employee count has trended lower since the first quarter. Should these trends continue, we think it's more likely than not the firm could see modest improvement in underlying operating profitability absent any sizable one-off costs. This is aligned with our base case valuation assumptions for the business.

Surprisingly, the board proposed cutting the firm's annual dividend payment, which is now set at SEK 1.00 per share for the coming year versus the SEK 1.50 per share paid in 2018. This should help alleviate pressure on the firm's discretionary cash flow and debt burden, with current leverage near 3.2 times 2018 adjusted EBITDA or roughly 5 times operating cash flow.

Finally, management indicated that remediation efforts at the firm's U.S. plants in Wayne, New Jersey, and Merrimack, New Hampshire, have been completed, and these operations can begin to focus on efficiency improvements and product approvals. Remediation activities at the firm's Hechingen, Germany, site will be ongoing for the next year or two, and we anticipate the firm will remain under increased FDA scrutiny over the coming years.