EUR 850.00 For Business Accounts Only

Morningstar | Hill-Rom Posts Strong Fiscal 2018 Results Driven by Encouraging Uptake of New Products; Raising FVE

No-moat Hill-Rom reported fiscal fourth-quarter results that largely tracked our expectations and issued 2019 guidance consistent with our outlook. We intend to raise our fair value estimate by a mid-single-digit percentage as we roll and update our model. While we've made some changes to our model to more accurately reflect management's planned exit of noncore business areas, we're encouraged to see that the operating and free cash flow outlook remains in line with our forecasts.

Management has maintained its outlook for 50 basis points of gross and 100 basis points of operating margin expansion annually, but it made a firmer commitment to underlying revenue growth of 4%-5% than we expected. However, the business faces headwinds to the tune of roughly 200 basis points related to business line exits and 100 basis points attributable to currency comparisons, leaving reported revenue growth limited to 1%-2% for the coming year. That said, we think the performance of Hill-Rom's new product portfolio has been outstanding, generating $300 million in revenue for the year or nearly double the $150 million reported in fiscal 2017. This far surpassed expectations, as this bucket had generated roughly $180 million in year-to-date sales as of the third quarter. Much of the strength came from the firm's newest med-surg bed, Centrella, which generated $50 million in incremental revenue during the fourth quarter and $100 million since its launch nearly a year ago. This growth has been supported by both replacement activity and competitive wins, which we think will be critical to continued success.

Overall, these products accounted for 60% of Hill-Rom's core growth rate in the quarter and are likely to remain a similarly significant contributor to results in fiscal 2019. Management expects to generate another incremental $100 million in sales from this group of products next year, which would exceed its initial objective by 2020 roughly a year ahead of schedule.

While the company's increased investment in research and development appears to be paying off, we anticipate Hill-Rom to return to deal-making in fiscal 2019. CEO John Groetelaars has put a stronger emphasis on looking for innovation externally since taking over roughly six months ago, and commentary suggests smaller tuck-in transactions are a likely use of capital in the near term.