EUR 850.00 For Business Accounts Only

Morningstar | ICU Medical's 2Q Blows Away Expectations; Raising FVE

ICU Medical reported a stellar second quarter, with gross margins handily beating our expectations and driving sizable upside to earnings for the quarter and full year. We'll probably raise our fair value estimate for the narrow-moat company by a high-single-digit percentage to account for this better-than-anticipated performance, as our longer-term margin projections are likely a little low.

While our sales estimate was on par with the results, gross margin expansion of 240 basis points versus the first quarter trounced our and consensus' forecast for a sequential step down. Mix effects from growth in the firm's higher-margin IV consumables business, along with better fixed-cost leverage thanks to increased volume in the consumables and intravenous solutions businesses, were the primary drivers of the beat. Management provided updated earnings and EBITDA guidance that came in well ahead of our figures, and we wouldn't be surprised to see additional upside before the end of the year. That said, we think management is being prudent in its conservatism, given the volatility expected in the third quarter associated with moving off the transitional service agreements currently in place with Pfizer. Thus far management has executed the implementation flawlessly, but the upcoming systems migration includes the larger and more complex business in the United States. ICU stands to see meaningful long-term cost savings in the neighborhood of $35 million by bringing these functions entirely in house, which should be fully realized during 2019.

ICU's return on capital profile has been on a steady march higher since bottoming out in the second quarter of 2017, in conjunction with the close of the Hospira Infusion Systems deal. We think this is strong support for our narrow moat rating; we'd be hard pressed to find another similarly sized transaction that afforded the acquirer excess returns after only a year of ownership.

Management addressed the rumors that ICU has been in discussions with the Smiths Group's medical division regarding a potential tie-up. While it sounds as if the two entities haven't been able to reach an agreement for now, we expect the ICU management team to continue to look for attractive assets that complement its existing business. With Hospira-related integration activities set to be complete by early 2019 and a balance sheet that we forecast will be sitting on $500 million in net cash by the end of next year, the company appears well positioned to again turn its focus toward acquisitions after a nearly two-year hiatus.