Is Hill-Rom's Plunge an Opportunity?

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If you have ever visited an ill friend or relative in the hospital, you've probably noted the company name on the hospital bed: Hill-Rom (NYS: HRC) . The Hill-Rom name is so ubiquitous in hospitals that you might think it has a monopoly on hospital beds. In fact, it has had to fend off -- and eventually settle -- several antitrust lawsuits over the past decade.

So you might think that the $30 million legal settlement charge that Hill-Rom took in its latest quarterly earnings report would be for yet another antitrust lawsuit. It isn't. It has to do with a billing dispute the company has with the federal government, and that money may or may not have to eventually be paid.

However, because of that charge, Hill-Rom's earnings plunged 95%. Shares fell 20% on that earnings news and have fallen an additional 15% since on the general market turmoil.

Is that scalping deserved, or is Hill-Rom now a genuine bargain?

Buying opportunity?
When analysts expect $0.54 per share in earnings but the result turns out to be $0.02 per share, then yes, that would call for more than a polite "I daresay" in response. But the fall from $45 a share to $30a share because of that one-time charge was probably an overreaction.

True, one of Hill-Rom's three business segments, International, took a hit in Europe, which represents about 70% of the companies overseas revenues. Hill-Rom's CEO blamed that downturn on the "macro challenges" in Europe, and he anticipates that those challenges will lead to a year-over-year decline in fourth-quarter international revenues.

Consider the following table for Hill-Rom and some of its competitors. What I am pleased to see here are the solid returns on invested capital. This metric speaks to how well a company uses its money.

Company

Forward P/E

Forward Dividend Yield

Dividend Payout Ratio

Return on Capital (TTM)

Hill-Rom Holdings12.11.5%22%15.2%
Kinetic Concepts (NYS: KCI) 12.6N/AN/A11.4%
Stryker (NYS: SYK) 11.81.5%22%14.6%
Becton, Dickinson (NYS: BDX) 12.92.0%27%14.6%
Invacare (NYS: IVC) 11.00.2%4%6.9%

Source: Yahoo! Finance.
ROIC computed from company earnings statements.
TTM = trailing 12 months.

My take
I think the pricing right now for Hill-Rom is quite attractive, but I don't think the company will have a sudden growth spurt. The worldwide economic problems will be a revenue constrictor for who knows how long. Also, domestically, proposed Medicare budget cuts could have a negative impact on Hill-Rom's business. If you do buy this stock, then buy it to sit on it ... for a while.

Add Hill-Rom and the other companies mentioned to your Watchlist.

At the time this article was published Fool contributorDan Radovskyowns no shares of the mentioned companies.Motley Fool newsletter serviceshave recommended buying shares of Stryker and Becton. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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