Hill Rom Gains On Solid Q4, Buyouts & Product Launches

On Dec 16, we issued an updated research report on Batesville, IN-based medical device manufacturer, Hill-Rom Holdings, Inc. HRC. The company currently carries a Zacks Rank #3 (Hold).

In the past six months, Hill-Rom outperformed the Zacks categorized broader Medical Product industry. In fact, the share price trend further improved after the company delivered promising fourth-quarter fiscal 2016 numbers. Per the last trading price, Hill-Rom gained 7.56% over the past six months, as against the broader industry's loss of 6.05%.

Apart from better-than-expected earnings and revenue numbers, the year-over-year outcome was impressive. Also the company witnessed record level of gross margin in the quarter. We are confident that the company will remain on a solid growth trajectory over the near term given its strong 2017 guidance. Based on several catalysts, we expect it to expand geographically in the coming quarters. Accordingly, we also expect Hill-Rom to keep up its bullish share price return trend momentum in the coming days.

We note that Hill-Rom has set its long-term financial goals (through fiscal 2018) taking the Welch Allyn buyout into consideration. The company projects revenue increase from its organic activities in the range of 3–5% annually at constant exchange rate with adjusted operating margin expansion likely to be 450–550 basis points (including the benefits from the Welch Allyn acquisition). Adjusted earnings per share (EPS) CAGR is expected in the mid-to-high teens compared with 2015 EPS projection. Cumulative operating cash flow is expected to be more than $1 billion.

Hill-Rom’s merger and acquisition pipeline continues to remain robust. The acquisition of Trumpf Medical is a strategic fit as it aligns with Hill-Rom's core growth strategies viz. portfolio diversification, geographic expansion and innovation. Inclusion of Trumpf has more than doubled the size of Hill-Rom's existing surgical platform.

Also, the company’s focus on innovation is reflected in its new product launches. Through fiscal 2016 it launched many products including Integrated Table Motion for the da Vinci Xi Surgical System in collaboration with Intuitive Surgical; the Welch Allyn RetinaVue Imager that makes diabetic retinopathy screening simple and affordable for primary care settings. It enhanced Welch Allyn Connex Spot Monitor, an easy-to-use vital signs monitor that provides comprehensive and accurate blood pressure measurement, pulse oximetry and temperature using a single device and the VisiVest Airway Clearance System, a connected therapeutic solution for patients with chronic lung disease.

On the flip side, unfavorable currency movement continues to be a dampener and the company does not expect any improvement any time soon. Moreover, the company witnessed top-line deterioration in most of its international businesses, on account of persistent weakness in the Middle East. In addition, competitive and global economic headwinds are other downsides.

Key Picks

Some better-ranked medical stocks include NxStage Medical Inc. NXTM, Baxter International Inc. BAX and Bovie Medical Corporation BVX. NxStage Medical and Baxter International sport a Zacks Rank #1 (Strong Buy) while Bovie Medical carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

NxStage Medical surged 26% over the last one year compared with the S&P 500’s 12.6% growth. The company has a four-quarter average positive earnings surprise of 46.3%.

Baxter International rallied 22% over the last one year, much higher than the S&P 500. It has a trailing four-quarter average positive earnings surprise of 27%.

Bovie Medical recorded a 137.3% gain in the past one year, way better than the S&P 500. The company has a trailing four-quarter positive average earnings surprise of 28.7%.

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