Hill Rom: Underfollowed medical equipment firm

Hill Rom Holdings (HRC) is a mid-cap medical equipment company overlooked by many investors.  Their product portfolio is extensive and growing with a concentration in patient mobility. The company also sells services for their products such as hospital room and facility design, training, and clinical solutions as well as providing rental and leasing of their equipment. The company has recently completed several acquisitions, including point of care diagnostics and testing equipment manufacturer Welch Allyn in 2015, German operating room equipment manufacturer Trumpf Medical in 2014 and disposable surgical blades and scalpels manufacturer Aspen Surgical in 2012.  Management plans on more acquisitions over the next few years. 

Of interest is the firm’s focus on acquiring mainly privately-held firms with strong niche markets that expand HRC’s product offering to their existing customers.  Only 40% of 2016 revenue was generated from hospital’s capital expenditure spending, such as beds and operating room equipment.  60% of revenues was from services, leases, and medical disposables. A strong non-capital expenditure dependent focus allows HRC to better maneuver some of the market fluctuations seen by its equipment peers.    

Years ago, HRC’s main products were hospital beds and funeral caskets, but in 2008 spun off the casket business and has been expanding its medical equipment business, mainly through acquisitions. For example, in 2015, HRC purchased privately-held Welch Allyn, a manufacturer of home- and doctor/hospital- based blood pressure testing equipment.   HRC reports with a Sept fiscal year end.  Total FY2016 revenues were $2.7 billion

The company focuses on patient care solutions in several core areas:

·    Advancing Mobility focuses provides patient care systems including a variety of bed systems, such as Medical Surgical (MedSurg) beds, Intensive Care Unit (ICU) beds, and Bariatric patient beds, as well as mobility solutions such as lifts and other devices used to safely move patients.

·    Wound Care and Prevention offers non-invasive therapeutic products and surfaces designed for the prevention and treatment of a variety of acute and chronic medical conditions, including pulmonary, wound, and bariatric conditions.

· Medical Equipment Management and Contract Services leases to health care providers a wide variety of moveable medical equipment, such as ventilators, defibrillators, intravenous pumps and patient monitoring equipment.

· Surgical Safety and Efficiency offers surgical tables, lights, and pendants utilized within the operating room setting. It also offers a range of positioning devices for use in shoulder, hip, spinal and lithotomy surgeries as well as platform-neutral positioning accessories for nearly every model of operating room table. In addition, it offers operating room surgical safety and accessory products such as scalpel and blade, light handle systems, skin markers and other disposable products. The products offered within this category are primarily recurring, consumable revenue streams.

·    Respiratory Health offers therapeutic products that provide bronchial hygiene (airway clearance) for acute and home care patients.

Hill Rom reports in three groups: Patient Support Systems, Surgical Solutions, and Front Line Care.  

Patient Support Systems FY2016 revenues were $1.4 billion, up 2% over previous FY 2015.  The company is forecasting low-single digit revenue growth for FY2017. 

Surgical Solutions FY 2016 revenues were $408 million, down 1% from FY2015. The company is forecasting mid-single digit revenue growth for FY2017.   

Front Line Care FY2016 revenues were $810 million, up 6% from FY2015. The company is forecasting mid-single digit revenue growth for FY2017. 

While revenues were relatively flat for 2016, margins are expanding as the firm realizes cost synergies from its Welch Allyn acquisition. In addition, the company is on an overall cost savings plan to boost profit margins.  

It is management’s goal to expand earnings per share by approximately 14% to 18% while growing revenues by 3% to 5%.  Although it is tall order, the street seems to believe management can deliver on these targets.

Of the six analysts following HRC, three have the stock recommended as a Strong Buy, two as a Buy and one as a Hold.  The average price target is $67, or 26% above HRC’s current price.  To achieve this price target, earnings will need to grow to over $3.94 per share and the PE ratio will need to expand from its current 15 PE to 17 PE.  This falls in line with EPS estimates of $3.78 in FY2017 and $4.19 in FY2018.  

Zack’s commentary on its Hold recommendation:  Hill-Rom ended fiscal 2016 on a promising note with its fourth quarter numbers squarely beating the Zack’s Consensus Estimate. The company’s outcome on a yea rover-year basis was also impressive. The company’s year-over-year outcome was impressive along with record level of gross margin. We are upbeat about the company to remain on a solid growth trajectory over the near term based on its strong 2017 guidance. Based on several positive catalysts, we expect the company to expand geographically in the coming quarters. Notably, in the last reported quarter, Hill-Rom posted strong growth in both Asia-Pacific and the U.S.

However, Hill-Rom’s persistent poor performance in the International front, especially in the Middle East and Latin America keeps us concerned. Unfortunately, no near-term improvement can be expected in the existing capital crunch condition that eventually led to economic and political downturns in these economies.

Hill Rom does not lack competitive pressures.    HRC competes with a variety of small and large companies such as Stryker Corporation, Universal Hospital Services, Philips, Covidien, GE Healthcare, Skytron and DeRoyal.

Investors seeking a smaller healthcare company would be well served to review Hill Rom. The company stock has almost doubled since Jan 2013.  While not as flashy as biotech or as massive as Johnson & Johnson, HRC is well positioned for a continuation of its expansion through acquisitions. 


Thanks for reading.  This article was first published in the Dec 2016 issue of Guiding Mast Investments.  George Fisher