A month has gone by since the last earnings report for Hill-Rom (HRC). Shares have lost about 19.5% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is Hill-Rom due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
Hill-Rom's Q3 Earnings Top Estimates, Margins Expand
Hill-Rom reported third-quarter fiscal 2020 adjusted earnings per share of $1.95, excluding the impact of certain one-time acquisition-related amortization expenses among others. The figure improved 58.5% from the year-ago quarter and also surpassed the Zacks Consensus Estimate by 35.4%.
The adjustments include expenses related to acquisition-related intangible asset amortization, special charges, regulatory compliance costs and COVID-19 related net costs and benefits, among others.
On a GAAP basis, earnings were $1.40 per share, reflecting a 191.7% surge from the year-ago reported figure.
Revenues
Revenues in the fiscal third quarter came in at $767.5 million, up 5.6% from the year-ago quarter (up 6.6% at CER). The top line beat the Zacks Consensus Estimate by 3.9%. The revenue growth reflects robust demand for critical care products in response to the pandemic.
The company’s core revenues rose 12%, reflecting the contribution of the Breathe Technologies acquisition and benefits of more than $100 million for COVID-related purchases. For investors’ note, core revenues exclude impact of foreign currency, divestitures and non-strategic assets the company may exit, including the Surgical Solutions international original equipment manufacturer business.
Geographically, in the reported quarter, U.S. revenues declined 4.2% while the metric outside the United States climbed 31.9% (up 35.6% at CER). In this case, the core revenues grew 40% primarily resulting from uptick in demand for COVID-related products like ICU and med-surg beds, thermometry and vital signs monitoring equipment.
Segmental Update
In the quarter under review, Patient Support Systems revenues rose 19.6% year over year (up 20.6% at CER) to $447.8 million. This segment’s core revenues increased 23%, resulting from robust demand for med-surg and ICU bed systems and rentals due to the pandemic, partially offset by a fall in patient handling equipment and Care Communications' nurse call and mobile offerings due to limited hospital access for installations.
Revenues at the Front Line Care segment improved 3.2% to $252.1 million (up 4.4% at CER). According to the company, this was driven by robust international growth, surge in global demand for the Welch Allyn vital signs monitoring equipment and thermometry and fulfilment of one-time Life2000 non-invasive ventilator orders of approximately $25 million. However, in the United States, fall in physician office visits led to a decline in certain product categories, including physical assessment and diagnostic tools.
The Surgical Solutions segment’s revenues declined 37.4% (down 36.7% at CER) to $67.6 million affected by delay in projects, limited hospital access for installations and the surgical consumables divestiture. Core revenues fell 21% due to project timing and capital delays due to the pandemic.
Margin
In the reported quarter, gross profit totaled $409 million. Gross margin expanded 423 basis points (bps) to 53.3% on a 14.7% rise in gross profit.
Selling, general and administrative expenses declined 6.8% to $202.3 million in the quarter under review, while research and development expenses rose 0.9% to $34.4 million.
Overall adjusted operating profit was $172.3 million, up 63.5% year over year. Moreover, adjusted operating margin expanded 795 bps year over year to 22.4%.
Cash Position
The company exited the fiscal third quarter with cash and cash equivalents of $331.8 million compared with $290.5 million at the end of the second quarter of fiscal 2020. Long-term debt for the company at the end of the fiscal third quarter was $1.78 billion compared with $1.86 billion at the end of the fiscal second quarter.
The company returned $114 million to shareholders through dividends and share repurchases during the first nine months of fiscal 2020.
Year to date, cumulative net cash, cash equivalents and restricted cash provided by operating activities was $314.8 million compared with $301.1 million at the end of the year-ago period.
Fiscal 2020 Guidance
Given the uncertainties related to the pandemic-led business disruptions, Hill-Rom is not reinstating its financial guidance. However, the company is upbeat about its performance through the fiscal third quarter and effective management of the company during this challenging period. Based on this, the company expects its fiscal 2020 adjusted earnings per share of at least $5.40 per share. The Zacks Consensus Estimate for the same is pegged at $5.44 per share.
Hill-Rom projects adjusted earnings per share, excluding the impact of intangible asset amortization associated with prior business acquisitions, within $1.23-$1.28 per share for fiscal 2020.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -32.13% due to these changes.
VGM Scores
At this time, Hill-Rom has a strong Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.
Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.
Outlook
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Hill-Rom has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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