Sleep apnea and respiratory device manufacturer Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) reported its latest full-year results to the market this morning. While profit growth was strong, it was also tarred by the costs of a lawsuit against ResMed Inc. (CHESS) (ASX: RMD). Here's what you need to know (all figures in NZ Dollars):
- Revenue rose 10% to $894 million
- Profit after tax rose 18% to $169 million
- Dividends rose 17% to 19.5 cents per share (2% yield)
- Gross margins widened due to lower production costs in Mexico
- Construction of new, larger factory underway
- $20 million spent on lawsuits against ResMed
- Outlook for $1 billion in revenue and $180 million to $190 million profit in 2018
So What?
My first thought was: 'Patent lawyers are expensive!' $20 million in legal fees represents a not insignificant chunk of this year's profit, although disputes of this kind are not unusual in the competitive healthcare field. Both ResMed and Fisher & Paykel have filed claims against each other regarding alleged infringement on their patents, and both appear to be certain of their position. Investors will have to wait to see how that one plays out, as the potential impact (an injunction preventing Fisher & Paykel from selling certain devices in the USA) could be serious.
On a more positive note, demand appears strong for the company's devices, with both devices and consumables revenue growing rapidly. The establishment of a new 15 hectare factory in Tijuana speaks to strong anticipated future demand that management is planning for. New products, greater uptake of existing products, and expansion into new markets represent an opportunity for Fisher & Paykel shareholders.
Now What?
The biggest issue with Fisher & Paykel is its price. The business is priced at 31 times earnings, or ~37 times operating cash flow, which is pretty racy for a manufacturing business. The company has virtually zero debt and business prospects appear strong, but the obvious risk is that some bad business thing happens (e.g. a negative decision in the patent case) and the market cools on Fisher & Paykel's prospects, repricing it to a more ordinary market multiple.
Thus an investor could easily be looking at a theoretical 30%-50% loss on their shares in the event of bad news. I think Fisher & Paykel is a high quality business and it has a track record of investing in, and delivering, growth. I would like to own it, but I would first have to investigate its future growth prospects in depth before considering a purchase at today's prices.
