Hill-Rom Holdings
HRC
is witnessing growth in domestic revenues, driven by the consistent performance of Patient Support Systems (PSS) and Front Line Care. However, general domestic and global economic headwinds, unfavorable foreign exchange, and competitive landscape are major downsides. The stock currently carries a Zacks Rank #3 (Hold).
Over the past year, Hill-Rom has outperformed its
industry
. The stock has gained 78.2% compared with the industry’s 12.6% growth.
Hill-Rom exited third-quarter fiscal 2021 with better-than-expected earnings and revenues. Excluding the COVID headwind, revenues advanced 10% at CER, fueled by stronger-than-expected performance across the vast majority of the portfolio. The year-over-year growth in Front Line Care (led by accelerated recovery across key Welch Allyn products) and Surgical Solutions (led by growth in demand for operating room tables) segments contributed to the top-line growth. The company’s recent launches including the Helion Integrated Surgical System for the United States market buoy optimism. It raised the financial guidance for 2021, indicating growth in revenues and earnings, which is encouraging.
Hill-Rom’s newly-initiated long-term (LT) growth strategies through fiscal 2022, focusing on all four strategic priorities, look attractive at this moment.
In terms of the first priority, to accelerate top-line growth with innovative products and solutions, during the second quarter of 2021, the company launched seven products and is on track to launch 10 new ones in the latter part of 2021. The product launches are projected to result in the contribution of growth annually over the next 2-3 years. Also, the company anticipates that the top line will have about 100 basis points of benefit from FX on revenues for the full year.
Going by the second key objective of international expansion and driving penetration in emerging markets, Hill-Rom expects emerging market revenue growth in mid-single-digits, lower than 15% EPS growth over the next three years.
The third priority area includes strategic M&As to strengthen its portfolio. According to the company, the acquisitions of EXL and Voalte created a durable new source of growth over a multi-year period. The company also expects future M&As to drive double-digit EPS growth and mid-single-digit top-line growth. To fortify its ground in the digital health space, Hill-Rom acquired the contact-free continuous monitoring technology from EarlySense in February.
The last key strategic priority area includes operational execution and strong financial performance. As part of the three-year growth plan, the company projects core revenue growth of approximately 5%, double-digit earnings growth and significant cash flow generation.
At the end of the third quarter of fiscal 2021, the company reiterated its commitment toward this previously disclosed long-term growth target.
On the flip side, Hill-Rom’s revenues in the fiscal third quarter were down 6.5% year over year (down 8.8% at constant exchange rate or CER). The year-over-year decline can be attributed to the challenging comparison with third-quarter fiscal 2020 figures that benefited from a one-time surge in COVID-related demand. The Patient Support Systems business had generated record revenue growth of 21% in the year-ago quarter. The business benefited from the global surge in demand for ICU and Med-Surg bed systems, as hospitals around the world expanded capacity in the early phase of the COVID outbreak. This unfavorable comparison translated into a PSS headwind of more than $105 million, resulting in Q3 revenue decline of 18% when compared to the prior year. In Front Line Care, third-quarter fiscal 2021 revenues were dull, impacted by the year-ago ventilator stockpile orders of approximately $25 million.
Overall, in the third quarter of fiscal 2020, the company had benefited from one-time COVID-related demand, generating approximately $130 million in revenues and adjusted earnings of 60 cents per share. With this challenging comparison, the reported quarter revenues declined significantly.
This apart, escalating costs and expenses are dragging down the margins. In the reported quarter, gross margin contracted 111 basis points (bps) to 52.2% on a 4.5% rise in the cost of net revenues. Selling, general and administrative expenses rose 6.7% while research and development expenses increased 5.5%. Adjusted operating margin contracted 541 bps year over year to 17%.
Key Picks
A few better-ranked stocks from the broader medical space are
Alcon Inc
ALC
,
McKesson Corporation
MCK
and
Biolase, Inc.
BIOL
, each carrying a Zacks Rank #2 (Buy). You can see
the complete list of Zacks #1 Rank (Strong Buy) stocks here.
Alcon has an estimated long-term earnings growth rate of 18%.
McKesson has an estimated long-term earnings growth rate of 8%.
Biolase has a projected long-term earnings growth rate of 15%.
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