EUR 850.00 For Business Accounts Only

Morningstar | ICU Medical Set to Generate Strong Free Cash Flow Despite Near-Term Revenue Headwinds

Following the transformative acquisition of Hospira Infusion Systems from Pfizer in 2017, we think ICU Medical deserves a narrow economic moat rating. Formerly a supplier of infusion consumables, ICU enhances its product mix with this purchase by bringing infusion pumps, a broader consumables offering, and IV solution manufacturing into the fold. In our view, this comprehensive portfolio creates a more defensible razor-and-blade model that gives us confidence in the firm's ability to generate excess returns over the coming decade. We applaud management for its decision to consolidate ICU's industry position through the acquisition of a much larger business and are impressed by the limited disruption shown to date. We expect management to benefit from its ability to sell a full suite of products, along with operational synergies that should stem from a more focused operation than existed under Pfizer's ownership. ICU's purchase consideration included a combination of balance sheet cash and newly issued equity, leaving the business debt-free, which will put the firm on strong footing following full integration.We hope ICU management can infuse a culture of strict compliance and stringent quality control into the acquired operations in order to overcome a legacy tarnished by a barrage of product recalls over the years. While there's been little to complain about in the year since ICU purchased the business, we'd caution investors from getting too complacent in an industry that's long provoked the ire of the Food and Drug Administration.We forecast modest revenue growth of roughly 4% annually over the coming five years, which implies some improvement in the underlying performance under new ownership. Additionally, we expect modest margin expansion to enhance shareholder returns as management focuses on optimizing operations. That said, we don't believe ICU will return to historical levels of profitability, given its current business mix, as lower-margin capital equipment and IV solutions weigh on gross profitability.