Hill-Rom (HRC) made an interesting acquisition last week, warranting a review of the operations and the investment thesis on this long-term value creator. The company has made a very nice bolt-on deal but the relative appeal is not enough to alter the investment thesis in a big way, as I believe that shares are largely fairly valued at these levels.
Hill-Rom has reached a deal to acquire Voalte. Hill-Rom is willing to spend $180 million in upfront cash for the business of Voalte as realisation of commercial millstones could result in additional payments which could increase the total purchase price by another $15 million.
Voalte was founded in 2008 and has been a pioneer in real-time mobile healthcare communications. With this deal, Hill-Rom becomes stronger in care communication and increases digital and mobile communication capabilities.
Based in Florida, Voalte is serving some 200 customers with more than 80,000 devices, generating $40 million in revenue in the process. Durable and double-digit revenue growth has been the reason why Hill-Rom has bought the business at 4.5 times sales, or nearly 5 times if milestone payments are included.
Voalte's platform connects over 200,000 caregivers with voice/alarm/text messages, and will be integrated with the offerings of Hill-Rom included with smart hospital beds and signs monitors, among others. The deal is expected to close in the third quarter, modest dilution is expected to adjusted earnings in 2019, and increasingly become accretive in 2020 and further into time.
Adding To Connected Care Mission
The mission of Hill-Rom is that of advancing connected care and the purchase of Voalte fits perfectly in that mission. The $40 million revenue contribution is relatively modest however. With $2.85 billion in revenues in 2018, the deal will contribute nearly 1.5% to pro-forma revenues and add nicely to the organic growth profile.
This $2.85 billion revenue base is split between the major patient support system business (responsible for half of sales) with front line care and surgical solutions making up the remainder of sales. The core patient support systems is mostly comprised of specialty beds, med-surg beds, rental services and safe patient handling. Front-line care is nearly a billion dollar business and is quite diversified with respiratory care, vital signs, physical assessment, other FLC and thermometry + blood pressure being key activities in that segment. The nearly half a billion dollar surgical solutions segment is comprised of blades + scalpels, consumables, positioning, tables + lights.
By focusing on the digital aspects of the business, as well as higher growth segments, Hill-Rom aims to see higher organic growth and better margins. In late 2018, the company reported full year results for the fiscal year of 2018 with reported revenues up nearly 4% to $2.85 billion. Net earnings came in at $252 million, or $3.73 per share. Adjusted earnings per share came in a dollar higher at $4.75 per share, with amortisation charges and special charges making up the majority of the discrepancy between both earnings numbers.
The business currently has 68 million shares outstanding which trade at $104 per share, for a market valuation of nearly $7.1 billion. Including $1.8 billion in net debt, the enterprise value amounts to $8.9 billion, which is equivalent to 3.1 times sales, suggesting that the company paid a premium to acquire the growth and capabilities of Voalte. With adjusted operating margins coming in around 20% for the overall business, adjusted operating earnings come in around $585 million, for an EBITDA number of close to $650 million. That makes that leverage stood at 2.8 times ahead of the deal, and closer to 3.1 times after the deal, which is on the higher side, but this is a stable business.
In terms of earnings multiples, Hill-Rom is not very cheap with shares trading at 22 times adjusted earnings, as core growth of 3% as reported in 2018 is not that impressive, while the business has some debt taken onto the balance sheet as well of course.
On the bright side is the guidance which calls for earnings of $5.08-$5.16 per share this year, which reduces forward adjusted earnings multiples to a somewhat more reasonable 20 times. This is driven by solid core revenue growth, seen at 4-5% this year, as multiples remain more than fair of course.
I like the bolt-on deal made by Hill-Rom but reality is that this is just a bolt-on deal and will not change the investment thesis a great deal, as shares remain somewhat expensive in my eyes, despite improving organic growth trends.
Shares have increased by a factor of 5 times in the past decade as valuation multiples have only expanded and while the long-term promise looks good, and current organic growth is pretty solid as well, valuation multiples are quite high while leverage is rather high as well.
Reality is that shares are valued fairly at this point in time and at this valuation. As a result, I am in no rush to chase shares at this point at all, even as sales multiples are somewhat appealing given the industry. This relative appeal stems from the fact that peers post even higher margins, making that I regard shares as fairly valued, but am in no rush to chase the shares.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.