Morningstar | First-Quarter Results Impress, but Valuation Remains Elevated for Hill-Rom Shares
Hill-Rom reported strong results to kick off its fiscal 2019, posting 6% underlying core revenue growth in the quarter. As we update our model for this no-moat name we'll likely raise our fair value estimate by a modest amount, helped by the cash flows received since our last update along with slightly better revenue growth across the board. Sales growth was offset by about 100 basis points of foreign exchange and another 200 basis points from business divestitures, but we think both core and reported metrics were particularly impressive. Management lowered its full-year fiscal 2019 EPS outlook by about 10 cents as it adjusted this year's accounting to incorporate ASC 606, but in light of these solid results early in the year we suspect expectations could move higher in the coming quarters.New product adoption has been the main theme behind Hill-Rom's results with its stable of newly launched products now accounting for $100 million in quarterly revenue, on track to meet management's $400 million goal for the year. Management reiterated its target of maintaining research and development expenditures at 5% of sales, and it seems clear that the stepped-up investment in this area over the last three years has begun to pay off. From a geographic perspective, the U.S. market continues to expand nicely, posting 7% core revenue growth over last year. The company's inconsistent international franchise is also showing directional strength, up 3% on a core basis following weaker-than-expected performance out of these markets in the second half of 2018.
While the firm continues to show underlying financial improvement, shares have already incorporated this outlook, from our perspective. Following this morning's positive reaction, the stock now trades north of 20 times our estimate for fiscal 2019 adjusted earnings. Historically, this has represented a peak valuation level for the business, and we'd await a more attractive entry point before considering shares.
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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