Flirting With Fresenius (FMS)

Fresenius Medical Care (FMS) is the world’s largest provider of dialysis services and products to patients with chronic renal disease.  It has some 2400 dialysis clinics in 30 countries, 70% of which are in the North America. In the United States, it also performs clinical laboratory testing and inpatient dialysis services and other services under contract to hospitals. 

FMS is a German company, sold as an ADR in the U.S., whose full name is Fresenius Medical Care AG & Co. KGaA.

COMPANY BACKGROUND:

According to the Reuters company report, Fresenius provided dialysis treatment to 184,000 patients in 2008, 84% were in the U.S.  During the year, FMS acquired 48 clinics, opened 127 new ones, and sold or consolidated 25.  It also launched UltraCare at Home which offers the full range of treatments and service to patients who want in-home care.

Fresenius’s most recent quarterly report shows that 62% of its revenues for the second quarter of 2009 came from North America, 22% from Europe, 6% from Asia-Pacific, and 4% from Latin America.  FMS gets about 36% of its total revenue from Medicare and Medicaid, and any reduction in reimbursement could be very detrimental.

The company’s corporate goal, adopted in 2005, is 7-9% annual revenue growth until 2010 as well as a 10% increase in net income.  This is from its Fact Sheet available at the FMS website.  Morningstar estimates a compound annual revenue growth of 7% through 2013.

Morningstar thinks FMS has several advantages over its competitors. In addition to providing dialysis services, it also sells dialysis products many of which are bought by its competitors. And, with its recent purchase of U.S. based Renal Care Group, FMS owns one of every three dialysis clinics in the U.S.  That’s key when location is important to both patients and physicians.

The one-click Annual Report spreadsheet by Bob Adams shows that FMS’s 2008 report rates a 49 out of 100 with six Bullish results (including decreasing accounts receivable, debt and shares outstanding) and twelve Bearish results (including inventories and cost of sales increasing, and inadequate ROE).  You can get this super-duper spreadsheet and a summary of its many features by going to my Favorite Link page, click here.  

DISCUSSION:

The table below compares the SSG by SaulS, which I got from BI’s First Cut page, with two SSGs of mine and with Take Stock.  The only difference between my two SSGs is that Armin-1 uses Hemscott-Morningstar data (like Saul did) while Armin-2 uses S&P data.  After the table, I discuss several SSG issues that were identified by the comparison.

Fresenius Medical Care (FMS)(ADR)	SaulS	Armin-1	Armin-2	Take Stock
Date	7-10-09	7-14-09	Same	Same
Data	Hemscott – Morningstar	Same	S&P	Hemscott -Morningstar
Price	$44.46	$43.89	Same	Same
52 week High &          Low Price	$58.38 & $34.30	Same &         Same	Same &       Same	Not                 Included
Last Q of                       Reported Data	Q4 ending 12/30/08	Same	Q1 ending 3/31/09	Q4 ending 12/30/08
Software Used	TK 6	TK 5	Same	TS Online
Project Growth          From End of	Last                  Quarter	Same	Same	Last                  Fiscal Year
Sales Growth	11.00%`	10.00%	Same	09.00%
EPS Growth	12.50%	09.50%	Same	07.64%
High PE	20.0	19.2               (Alt-M)	21.0         (Alt-M)	19.2
High EPS	$5.02	$4.39	$4.33	$4.03
High Price	$100.40	$84.30	$90,90	$77.49
Value Line Estimated High Price = NOT AVAILABLE
Low PE	14.0	12.0               (Alt-M)	12.5         (Alt-M)	12.0
Low EPS	$2.79	Same	$2.75	$2.79
Low Price	$39.00	$33.50	$34.40	$33.48
Upside/Down	10.2	3.9	5.0	3.2                (imputed)
Total Return	19.0%	15.3%	17.0%	13.5%
SSG Buy Under	N/A	$44.51	$47.98	$41.38
RV/PRV                           (no outliers)	77.7/68.8	82.2/75.2	83.2/75.9	Not                  Included
Quality	4.7 (from Take Stock)	Not                   Included	N/A	4.7
PTPM – 5 yr ave	11.4%               Trend up	Same	11.8%  Trend up	11.4%            Trend N/A
ROE – 5 yr ave          End Equity	N/A	10.8%          Trend up	10.9%  Trend up	Not               Included
ROE – 5 yr av      Start Equity	11.5%              Trend up	Same	11.6%  Trend up	11.5%              Trend N/A
Debt to Equity –          5 yr ave	???	???	73.0%  Trend up	Not              Included

 (1) Estimating EPS:

– When I did my SSGs, the 5 analysts I checked were estimating long-term EPS at an average of 12.20% with S&P high at 15.00% and both FirstCall via YahooFinance and Reuters.com were low at 10.83%.  Zacks was 11.33%, FactSet CallStreet via CNNMoney was 13.00%, and Value Line made no estimates as its report was in its Small and Mid-Cao Edition.

** FactSet’s estimate came from 6 analysts who ranged from 17.0% high to 10.0% low.  Reuters 4 analysts ranged from 14.0% high to 9.32%.

** I estimated 9.50% EPS, some 3.00% less than Saul, 2.70% less than the consensus average, and almost the very lowest of any analyst (9.32% at Reuters).

– A new feature of TK 6 allows the Preferred Procedure to show on the front page of the SSG which shows that Saul did not use the PP.  Saul’s used 12.50% EPS which he said was conservative because it was almost 3.0% less than FMS’s historical average. 

** However, 12.50% EPS was not conservative compared to the consensus average of the five analysts I checked (12.20%).  Nor was it conservative compared to Saul’s default PP of 9.60%.

(2) Forecast High & Low PEs:

 – I knew nothing about FMS before I did my SSG.  In such a case, and without any Value Line for guidance, I usually choose my initial Forecast High PE by using Alt-M.  That is often Toolkit’s most conservative option which averages the lowest 5 High PEs in the last 10 years. See: Determining What’s Reasonable and What’s Not: An Update

– Saul Forecast High & Low PEs were 20.0 & 14.0 which were close to my Alt-M’s 19.2 & 12.5.  Saul’s Low PE was from 2008.

(3) Debt to Equity:

– Using the same Hemscott data, Saul and I differed on Debt/Equity which should not happen.  Because Saul’s SSG was in PDF format I could not examine his annual data. 

– However, I spoke to Technical Support at IClub Central, the maker of our Toolkit software, and confirmed that my TK 5 was not broken.

 4) Final Results:

– With Hemscott data, Saul and I got SSG Buys (with U/Ds > 3.0 and TRs > 15%), but Take Stock did not as its TR was only 13.5%.

– Armin-1 is a SSG Buy that is well under Saul’s, but it is still a SSG Buy.  Saul got a 10.2 U/D and 19.0% TR whereas I got 3.9 U/D and 15.3%.

– Double-digit U/Ds are a red-flag warning sign for me to rethink my judgments as they might be too high.

– With S&P data, but with the same judgments, Armin-2 is a much better SSG Buy than Armin-1 with Hemscott data. That’s because Armin-2 has one later quarter of data than Armin-1.

(5) Final Thoughts:

– FMS is not recession-proof, as I would have thought, and Sales growth has declined in the last two years from 16.0% to 11.7% in 2007 to 9.2% in 2008 (Hemscott and S&P data are identical). 

– I don’t know anything about dialysis so maybe you could help me by answering some questions:

 ** Can dialysis be delayed or deferred; for exampke, can a twice-a-month schedule safely be changed to once-a-month?

 ** How much does each dialysis visit cost a Medicare patient (in dollars), a non-Medicare patient with “good” insurance coverage, a non-Medicare patient with no insurance?

Armin

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