On Dec 31, 2015, we issued an updated research report on Illinois-based medical device company, Hill-Rom Holdings, Inc. HRC. The company collaborates with health care providers in more than 100 countries and focuses on patient care solutions that improve clinical and economic outcomes in five core areas: Advancing Mobility, Wound Care and Prevention, Clinical Workflow, Surgical Safety and Efficiency, and Respiratory Health.
Hill-Rom ended the fourth quarter of fiscal 2015 on a promising note, surpassing the Zacks Consensus Estimate on both the top and bottom line. The solid guidance for fiscal 2016 should further bolster investors’ confidence in the stock. However, the operating margin scenario at Hill-Rom remains disappointing due to high cost burden.
Impressively, Hill-Rom recently completed the $2.05 billion worth mega acquisition of Welch Allyn, a New York-based privately held medical diagnostic equipment maker. Welch Allyn’s global reach with operations in 30 countries worldwide is expected to widely expand the company’s business.
Post acquisition, Hill-Rom has set its long-term financial goals (till fiscal 2018). The company projects organic revenue growth in the range of 3–5% annually at constant exchange rate (CER) with adjusted operating margin expansion in the range of 450–550 basis points (including the accretive benefit of the Welch Allyn acquisition). Cumulative operating cash flow is expected to be more than $1 billion.
The acquisition of Trumpf Medical also strategically fits Hill-Rom's core growth strategy, which has already contributed significantly to the latter’s top-line performance in fiscal 2015, particularly in the U.S. market.
In addition, the company has introduced several new products through 2015, all of which contributed 7% organic growth at CER. Important among them are Hill-Rom’s new bariatric offering Compella, LikoGuard Overhead Patient Lift, enhancements to its market-leading ICU frame Progressa and several exciting new products across Surgical and Respiratory Care franchises.
On the flip side, the gloomy margin scenario at Hill-Rom reflects the high cost burden the company is suffering from, primarily due to its Trumpf acquisition. A lower pricing environment and higher depreciation expense from certain rental investments are also responsible for the margin deterioration.
Further, unfavorable currency movement has been a major dampener during the fourth quarter and the company expects foreign exchange to negatively impact its fiscal 2016 revenue outlook by approximately 1–2%, signaling currency headwinds to persist in the near term as well.
Currently, Hill-Rom carries a Zacks Rank #3 (Hold).
Key Picks in the Sector
Some better-ranked medical products stocks are ICU Medical, Inc. ICUI, INSYS Therapeutics, Inc. INSY and Nxstage Medical, Inc. NXTM. All three stocks sport a Zacks Rank #1 (Strong Buy).
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