After Tough Q2, Fresenius' Outlook Cut for 2022, Pulled for 2025; Shares Cheap Even After FVE Cut

Narrow-moat Fresenius Medical Care turned in another disappointing quarter thanks to COVID-19-related mortality challenges, labor inflation, and general operating inefficiencies. As a result of these ongoing negative trends, the company cut its 2022 outlook to a high-teens profit decline (from a low- to mid-single-digit increase). This is very disappointing, especially after a mid-20s profit decline in 2021. The firm also retracted its guidance for 2020-25, which had called for high-single-digit profit growth, because of labor and general inflation uncertainty. We now view that previous outlook as a bull-case scenario. Given recent trends, we have cut our intermediate-term assumptions to 4% profit growth for 2020-25 from 7% previously in our base-case scenario. This change has resulted in a fair value estimate cut to EUR 67/$34 from EUR 78/$42. While we recognize the high uncertainty around future cash flows, we still view Fresenius shares as significantly undervalued, trading at about 14 times depressed 2022 earnings, considering its turnaround potential under the incoming new management team and as the pandemic turns into an endemic situation.