Not too long ago, I wrote that Fisher & Paykel Healthcare Corp Ltd (ASX: FPH)("FPH") was trading 'above what a prudent investor (one seeking a margin of safety) would ideally pay for the shares'. In price to earnings (P/E) terms, Fisher & Paykel is nearly 30% more expensive than CSL Limited (ASX: CSL), but today's results show just why the market loves it.
Here are Fisher & Paykel's highlights for the 12 months to 31 March 2016:
(All figures are in NZ$ unless indicated otherwise)
- Revenue grew 21% to $815.5 million (up 14% in constant-currency terms)
- Net Profit After Tax (NPAT) grew 27% to $143.4 million (up 15% in constant-currency)
- Dividends of 10 cents per share (8 cents per share last year)
- Investment in R&D increased by 13%, is now 9% of operating revenue
- Gross margins widened by 2.8% (operating margins grew by 0.6%)
- North America is the fastest growing region, up 33%, while Europe, Asia Pacific and Other grew mid-teen percentages or less
- Gearing was 7.7%, outside target range of -5% to +5% (debt to debt plus equity)
- Debt of $65 million, cash of $14 million
- 83% of revenue comes from recurring items, consumables, and accessories
So What?
There's a lot of information to digest if you're an FPH shareholder. Key elements are the company's products, which address unmet medical needs such as humidification for invasive ventilation. It has one product named, Optiflow, which has been found to reduce the need for intubation, re-intubation and increase ventilator free days.
Having products whose effects are validated by medical literature and which contribute to improved patient quality of life and reduced cost/staff demands is a great way to ensure hospitals keep buying those products. Fisher & Paykel released a bullish growth outlook (more on that below) and believes a significant increase in margins will be possible over the next few years, ultimately leading to more profits for shareholders.
A strong tailwind is growing demand in developed markets, currently estimated at US$6 billion, although developing nations are also seeing demand growth. Chinese healthcare expenditures are expected to triple (from 2012) by 2020. Fisher & Paykel is also using its masks to take market share from incumbents, which speaks to the quality of its products.
Now What?
Fisher & Paykel guided for revenue of approximately $900 million and NPAT of $165 million to $170 million in 2017, at current exchange rates. Based on management's recent history of under-promising and over-delivering, this could be a reasonable forecast. If accurate, it would mean that Fisher & Paykel is trading on a PE ratio of around 32, which is closer to CSL, but still more expensive.
The company also operates in a competitive segment with a number of companies such as ResMed Inc. (CHESS) (ASX: RMD) and Somnomed Limited (ASX: SOM) operating in overlapping or related fields. However, FPH has a massive, growing portfolio of patents (page 28 of the presentation) which will help protect it from imitation.
Based on these results and the outlook for its target market, Fisher & Paykel looks likely to justify today's price and could in fact be a buy for the patient investor.
