Fresenius Medical Care is the world's largest provider of technology and products for kidney dialysis treatment. Yet it is the company's share price that's in need of medical treatment following a profit warning caused by a combination of missed forecasts and lawsuits in the US over alleged health complications involving two of its products. The price has underperformed the Dax 30 index of major German companies by about 35 per cent since the summer. Yet that creates the possibility that it can bounce if the company can sort out its problems.
- Problems look largely short term
- Leading shares of niche market
- Shares on historical low rating
- Competition from Baxter
- Legal challenges
And whatever its short-term problems - the company missed its forecast for third-quarter sales and profits by just 2 per cent - Fresenius Medical has an enviable market niche in dialysis products and services. The company, which was a spin-out from the larger Fresenius Healthcare (which still owns 30 per cent), is the market leader of the $75bn (£46bn) global dialysis market. It concedes ground to US company Baxter in some specialist areas, such as peritoneal dialysis, but Baxter's global market share still lags behind. Fresenius generates two-thirds of its revenues in the lucrative US market and benefits both from the sale of machines and drugs and products related to kidney treatment. It also has an important foothold in emerging markets, with China rising to be the second biggest buyer of dialysis equipment after the US. That fits in with management's notion that Fresenius can continue to grow its business simply by following the trend for more new dialysis clinics in which it can place its machines.
FRESENIUS MEDICAL CARE (FME) | ||||
|---|---|---|---|---|
| ORD PRICE: | €52.8 | MARKET VALUE: | €16bn | |
| TOUCH: | €52.4-€52.8 | 12M HIGH: | €60.3 | LOW: €49.6 |
| DIVIDEND YIELD: | 1.8% | PE RATIO: | 17 | |
| NET ASSET VALUE: | €26.7 | NET DEBT: | 89% | |
| Year to Dec 31 | Turnover ($bn) | Pre-tax profit ($bn) | Earnings per share ($) | Dividend per share (€) |
|---|---|---|---|---|
| 2009 | 11.2 | 1.46 | 2.99 | 0.61 |
| 2010 | 12.0 | 1.64 | 3.25 | 0.65 |
| 2011 | 12.8 | 1.78 | 3.54 | 0.69 |
| 2012* | 13.7 | 1.90 | 3.70 | 0.80 |
| 2013* | 14.7 | 2.12 | 4.03 | 0.94 |
| % change | +7 | +12 | +9 | +18 |
Beta: 0.6 €1=$1.316 *Berenberg Bank estimates | ||||
There are also technical reasons to buy Fresenius's shares in preference to other Dax 30 constituents. That's because at some point its share rating should return to the mean, so Fresenius's shares are more likely than others to hold up if the Dax falters.
True, there are bear points to consider. Baxter has been aggressively challenging the company's grip on the dialysis market, with the latest reports linking it to a possible takeover of Swedish hemodialysis company Gambro. That would give Baxter traction in Fresenius's main hemodialysis market for the first time and that may put profits under pressure in the long run. In addition, Fresenius faces lawsuits in the US over deaths that are possibly linked to its NaturaLyte and GranuFlo products. This has turned into a class action suit that Fresenius will defend. The share price fall since the summer has arguably priced in the likely cost of an out-of-court settlement and the shares are likely to bounce if legal uncertainty is removed.
