Can Hill-Rom Succeed Against Stryker?

As demand for health care services increases thanks to Medicaid expansion and the roll-out of national medical insurance exchanges, medical supply manufacturer Hill-Rom (NYSE: HRC), is making investments to broaden its product portfolio.  It's also returning money to shareholders through an aggressive buyback program. But do these moves position the company to win against Stryker's Medical and Surgical supply business?

Competing for beds
Hill-Rom offers a variety of products and services for the health-care industry. The company's best-selling product is hospital beds, but it also sells a variety of other goods, including wound therapy systems, stretchers, respiratory products, and surgical equipment.  That puts the company in direct competition with Stryker's Medical and Surgical division.

In developed economies like the United States, the two companies compete in a mature market for hospital beds. The U.S. market is driven more by upgrading the country's 925,000 existing beds, rather than outfitting new hospitals. As a result, it's a highly competitive market offering little growth.  


That's why Hill-Rom and Stryker are finding developing markets like Brazil, which has fewer beds per 1,000 people than the U.S., and China, which is committed to overhauling its hospital infrastructure, more attractive.  

These new markets offer Hill-Rom an opportunity for faster growth, but only if it can innovate more quickly and price more aggressively than the much larger and more diversified Stryker.  In the most recent quarter, Stryker generated  $792 million in third quarter sales from its medical and surgical business while Hill-Rom produced sales of $438 million company wide. 

Strengthening its product line
To better compete with Stryker,  Hill-Rom bought Aspen Surgical Products for $400 million in July 2012, expanding Hill-Rom's presence in both North America and Europe, and adding $120 million in annual revenue. 

The Aspen acquisition helped Hill-Rom's surgical and respiratory sales grow 14.6% to $64 million last quarter, leading to a 1.5% increase in total Hill-Rom revenue.  The company's sales in the United States grew 1.1%,  while international sales grew 2.3%. 

Hill-Rom hopes higher sales will translate into bigger profits as it leverages scale and cuts costs. That has the company forecasting  3% to 4% operating margin growth over the coming four years. If it can deliver on those predictions, Hill-Rom's adjusted earnings per share will grow at a compounded low-teens rate through 2017.

Aggressively buying back shares
The company's successful efforts to control expenses are already fueling an increasingly aggressive share buyback program. The company's operating cash flow has steadily increased over the past five years, allowing Hill-Rom to repurchase 700,000 shares for roughly $24 million in the fourth quarter. That brought the yearly total it spent buying back shares to $94 million.

Hill-Rom expects to return even more money to shareholders next year, thanks to a recently approved $190 million buyback program. 

HRC Cash from Operations (TTM) Chart

HRC Cash from Operations (TTM) data by YCharts

The buybacks are making analysts increasingly optimistic for earnings per share next year.  Over the past 90 days, they've boosted their fiscal 2014 earnings predictions from an average $2.22 per share to $2.42 per share.  They've also increased their 2015 earnings forecast from $2.38 per share to $2.70 per share.

Hill-RomEPS Trends

Current Qtr.

Next Qtr.

Current Year

Next Year

13-Dec

14-Mar

14-Sep

15-Sep

Current Estimate

$0.51

$0.61

$2.42

$2.70

7 Days Ago

$0.51

$0.61

$2.42

$2.70

30 Days Ago

$0.51

$0.54

$2.22

$2.39

60 Days Ago

$0.51

$0.54

$2.22

$2.39

90 Days Ago

$0.51

$0.54

$2.22

$2.38

Source: Yahoo! Finance.

During the same period, analysts have held the line on their earnings estimates for Stryker. Currently, they expect Stryker will generate earnings per share of $4.63 next year. That gives Stryker a forward price-to-earnings multiple of 16.14 versus Hill-Rom's 15.46. Looking at it differently, the price to future growth at Stryker is 2.05 times, compared to 1.41 times for Hill-Rom, according to data compiled by Yahoo! Finance.

Overcoming hospital cost-cutting
Hill-Rom and Stryker both face potential headwinds tied to spending by small, rural hospitals. Those hospitals may lose market share to larger competitors as insurers cut deals to reduce costs.  As a result, spending at small and midsized hospitals may shrink, reducing demand for medical equipment and supplies. 

Despite that risk, an aging global population is likely to drive procedure volume higher, not lower. That has some industry watchers estimating that global spending on hospital beds -- a core offering of both Hill-Rom and Stryker -- will grow from $3 billion to $4 billion by 2017.  A lot of the market's potential growth will come from emerging markets in Asia, according to research firm Global Industry Analysts,

But the risk and opportunity aren't restricted to just these two suppliers. Invacare sells beds in the home and long-term care markets, which are expected to benefit as care shifts away from more expensive hospitals. However, Invacare still faces headwinds as consumers and facilities tighten purse strings amid rising health-care costs. As a result, like Hill-Rom, Invacare is expanding into new markets including Asia, where it currently gets 5% of its sales.  

In addition, other institutional suppliers of medical equipment, like CareFusion , will also be pressured. That company sells a variety of infection prevention and respiratory care products, as well as products tied to patient surveillance, in more than 130 countries. CareFusion, like Hill-Rom, is seeking to strengthen its product line, acquiring General Electric's Vital Signs business in mid November.    That deal will boost CareFusion's sales overseas, because Vital Signs gets roughly a third of its sales outside the United States. 

Watching admission trends
Hill-Rom hopes it can push deeper into Europe and expand in Asia this coming year. If it can build upon the early success integrating its Aspen acquisition, Hill-Rom may find that rising cash flow will allow it to return more money to shareholders over the coming years. However, despite HIll-Rom holding a 70% market share in hospital beds, Stryker is big player that could pressure Hill-Rom's pricing. Since the market for such products is tightly tied to hospital capital spending budgets -- a wild card in the wake of the Affordable Care Act -- investors will need to keep an eye on hospital admission trends as a marker for potential demand for Hill-Rom's products.

The article Can Hill-Rom Succeed Against Stryker? originally appeared on Fool.com.

Todd Campbell has no position in any stocks mentioned. Todd owns institutional research firm E.B. Capital Markets, LLC.  E.B. Capital's clients may or may not have positions in the companies mentioned.  Todd also owns Gundalow Advisors.  Gundalow's clients do not have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.