Grifols SA ADR GRFS

Grifols: Downgrading Moat and Capital Allocation Rating on Competition and Weak Balance Sheet

We're lowering our Grifols moat rating from narrow to none and lowering our Capital Allocation Rating from Standard to Poor after reassessing the firm's long-term competitive advantages and debt levels. Grifols has long been admired for its engineering expertise at its fractionation and purification centers, but poorly run and sprawling collection centers have weighed on returns, and we don't think pipeline innovation will allow it to keep up with narrow-moat peer CSL, which maintains a mix of plasma-derived and innovative products. While Grifols is rebounding from temporary pandemic headwinds, we think more fundamental changes to the competitive landscape are finally becoming clearer, and we see significant pressure on Grifols' ability to improve returns despite recent cost control efforts. We're maintaining our EUR 10.90 ($11.80) fair value estimate, which already incorporates revenue growth and adjusted EBITDA near the low end of management's 2024 guidance as well as low- to mid-single-digit revenue growth beyond 2024 as competition in the alpha-1 market and autoimmune-related immunoglobulin indications ramp up. Even with these relatively conservative expectations, shares are trading roughly 40% below our fair value estimate, as we think the market is overly concerned about Grifols' ability to improve its financial health.