Morningstar | 3Q Results Put Hill-Rom on Track to Meet Full-Year Goals
No-moat Hill-Rom reported fiscal third-quarter results that were largely in line with our forecasts, with modest outperformance in the United States offset by somewhat softer results internationally. We don’t see much need to make major changes to our model and will probably raise our fair value estimate by only a modest percentage to reflect the cash flows received since our last update.More important, we got our first read into new CEO John Groetelaars' vision, expectations, and strategy for Hill-Rom's business. Unsurprisingly, his discussion largely followed precedent set by prior leadership, although with some modest differences in emphasis. Hill-Rom's overall strategy is likely to see little deviation, with a continued focus on growth driven by internal research and development, international expansion, and the opportunity for continued acquisitions. The potential for a medium-size or larger transaction appears to be a bit more likely following management's commentary, with Groetelaars highlighting the firm's active deal pipeline and step-up in investment behind business development activities in each operating segment. With leverage near 3.6 times EBITDA, trending toward 3.2 times by the end of the fiscal year, we think the company's balance sheet flexibility is somewhat constrained but wouldn't preclude going after the right opportunity. Management successfully took leverage to 4-5 times EBITDA in its pursuit of Welch Allyn in 2015, which could indicate roughly $500 million-$800 million in available dry powder in the ensuing quarters.
The firm's new product strategy appears to be performing nicely, with management's measure of sales contribution from new products eclipsing $180 million year to date and driving over half of the company's 4% core growth rate in the quarter. This metric should cross the $200 million mark by the end of fiscal 2018, on track to meet management's target of $350 million by 2020.
Hill-Rom Holdings is a medical technology company. The company's reportable segments are: Patient Support Systems, which include a variety of frames and surfaces (such as medical surgical (med-surg) beds, intensive care unit beds, and bariatric patient beds), patient mobility solutions (such as lifts and other devices used to move patients), non-invasive therapeutic products and surfaces, and its information technologies and software solutions; Front Line Care, which includes its patient monitoring and diagnostics products and its respiratory health products; and Surgical Solutions, which include tables, lights, and pendants utilized within the surgical setting.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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