Update: Fresenius Medical Care Earnings Deliver Positive Surprises But Not For The Bottom Line

| About: Fresenius Medical (FMS)


Fresenius Medical Care reported surprisingly high revenue growth, but still a 10% fall of net income.

Higher than expected patient growth did not translate into operating leverage.

I had anticipated margin problems in my 2013 article on the company and even the recently announced restructuring won't improve the pressure on net margins over the long term.

Fresenius Medical Care (NYSE:FMS) reported Q2 earnings on July 31 and at first the stock market reacted positively, as the company reported much stronger than expected revenue growth. Revenues grew mainly due to more patients (about 15,600 YoY), of which 7,200 alone in the Asia-Pacific region. However, there was no operating leverage translating revenue growth into higher net income. In North America, in spite of 5.4% revenue growth, the drastically shrinking operating margin resulted in reduced operating income. At least in the International segment, which delivered 2.5% revenue growth margins improved 10 basis points - not more than a tiny bit. All in all, Fresenius reported 3.5% lower operating income of $1,001 billion and, mostly due to higher taxes and lower interest income, an even heavier 10% decline of net income.

I already had highlighted Fresenius' margin problems in my 2013 article and on the April 2014 Capital Markets Day, Fresenius announced several restructuring initiatives to improve margins. The company also announced to target a 10% revenue CAGR until 2020, which at first impacted the stock very positively. However, later that day, when the financial outlook was presented together with margin forecasts, the stock tanked. Unfortunately, investors will have to accept that future revenue growth delivered by Fresenius won't make it not even proportionally to the bottom line, as it projects only high single digit net income growth for the 2015-2020 period.

That said, I believe that with consensus EPS expectations for 2014 of $1.78 per ADR and a growth rate of 8%, the stock is probably about fairly valued at $35-40.

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