Company Reports

Narrow-moat Fresenius Medical Care turned in strong first-quarter results but may have disappointed the market with its weak treatment trends and merely maintained 2024 outlook. Overall, our 2024 expectations remain at the high end of management's outlook, and we do not anticipate changing our fair value estimate, which remains well above recent trades.

GLP-1 drug use is increasing materially in patients with diabetes and obesity, and uncertainty around GLP-1 expansion has added risk to dialysis stocks even as pandemic challenges, including excess mortality and labor costs, are easing for the narrow moat dialysis companies we cover—Baxter, DaVita, Fresenius Medical Care, and Fresenius SE. Despite the concerns, new data rolling in on GLP-1s appears roughly in line with our view that GLP-1 expansion should not materially affect dialysis demand for at least the next decade, as mildly extended kidney disease progression to dialysis may be largely offset by cardiac and first-year survival, or "crash," benefits. Considering this roughly neutral outlook, we find the significant discounts to fair value in dialysis-related stocks compelling.

Shares of dialysis-related narrow-moat companies Baxter, DaVita, Fresenius Medical Care, and Fresenius SE rose materially on news from a kidney-related trial of Novo Nordisk's obesity drug Ozempic (semaglutide). Similar to the 20% reduction in cardiac events seen in another trial for semaglutide (Novo Nordisk's Wegovy) in 2023, Ozempic was found to reduce the risk of major kidney disease-related events by 24%, including cardiac events, deaths, and kidney disease progression. Dialysis investors appear relieved that the reduction in all of those events wasn't much larger than the cardiac event benefits already seen in recent trials, suggesting that GLP-1s like semaglutide probably are not ushering in a paradigm shift in kidney disease progression. Baxter, Fresenius Medical Care, and Fresenius SE all trade at material discounts to our fair value estimates even after their shares' rise in early trading March 5.

Narrow-moat Fresenius Medical Care turned in solid fourth-quarter results and exceeded our profit expectations for the full year, but 2024 guidance was a bit lighter than we were anticipating. Overall, though, we do not anticipate changing our fair value estimate, which remains well above recent trades.

In a positive development, narrow-moat Fresenius Medical Care turned in solid third-quarter results and increased its guidance for the full year. We do not anticipate changing our fair value estimate on the company. However, we recognize continued improvement in its profit prospect could act as a catalyst for its undervalued shares, assuming potential obesity drug effects do not derail the progress.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from decent demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to grow at a similar pace during the next five years, if it can get past current inflationary and other challenges.

Shares of dialysis-related narrow-moat companies—DaVita, Fresenius Medical Care, Fresenius SE, and Baxter—all declined substantially on news that a kidney-related trial of Novo Nordisk's obesity drug Ozempic slowed the progression of kidney disease in patients with chronic kidney disease and diabetes. These results suggest the new obesity drugs may slow the incidence rate of patients needing dialysis in the long run, which we plan to account for in new fair value estimates by reducing our long-term growth assumptions in this group. With the most exposure to dialysis patient growth, we plan to reduce our fair value estimates on DaVita and Fresenius Medical Care by about 10%. Fresenius SE holds a large stake in Fresenius Medical Care, but the diversity of its operations constrained our fair value decline to the midsingle digits. Baxter's business diversity also helps blunt the impact of this news along with recently generated cash flows, and we do not plan on making any change to our Baxter fair value, although market sentiment around its 2024 kidney care spinoff valuation may be lackluster. Even with these challenges and lower fair values, we continue to view shares in these firms as significantly undervalued.

Narrow-moat Fresenius Medical Care turned in decent second-quarter results and increased its guidance for the full year. After tinkering with some of our near-term assumptions, we are keeping our EUR 67 per share fair value estimate unchanged and boosting the ADR fair value to $37 per share on foreign exchange rate changes since our last valuation update.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to reach the midsingle digits compounded annually during the next five years, if it can get past current inflationary and other challenges.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to reach the midsingle digits compounded annually during the next five years, if it can get past current inflationary and other challenges.

Fresenius Medical Care turned in decent first-quarter results and maintained its guidance for the full year. At first glance, we do not anticipate changing our fair value estimate (EUR 67/$34) based on this announcement. Overall, the firm's margin goals look achievable to us, and we think its competitive positions in its two major businesses remain intact. However, any further missteps by (new) leadership on its path back to economic profitability may cause us to rethink our narrow moat rating, which currently accounts for about 7% of intrinsic value. Even if that rating change were made, though, Fresenius shares would still appear moderately undervalued.

At its investor day, Fresenius Medical Care provided more insights into its margin improvement goals that surprisingly depend on its medical technology (care enablement) segment, which was decimated during the pandemic. The firm's margin goals look achievable to us, and we think its competitive positions in its two major businesses remain intact. However, we would highlight that any further missteps by (new) leadership on its path back to economic profitability may cause us to rethink our narrow moat rating, which currently accounts for about 7% of intrinsic value. Even if that rating change were made, though, Fresenius shares would still appear significantly undervalued.

Fresenius Medical Care, the narrow-moat global dialysis leader, turned in fourth-quarter results that helped it exceed our 2022 expectations moderately. However, with continued challenges, its 2023 outlook was lower than we anticipated. Shares appeared to rise, though, on the increased visibility toward intermediate-term improvement and Fresenius SE's decision to maintain its 32% stake in the company until full intrinsic value can be unlocked, which may add near-term stability to shares. We are keeping our fair value estimate intact, and shares remain undervalued, in our opinion.

Narrow-moat Fresenius Medical Care announced that Dr. Carla Kriwet has stepped down after only a couple months at the helm as CEO due to "strategic differences" with its boards. The company's CFO (and deputy CEO and chief transformation officer), Helen Giza, will take over as head of the company. We do not anticipate changing our fair value estimates for Fresenius Medical Care or large stakeholder Fresenius SE at this juncture, but this move points to more uncertain times for shareholders, as management has yet to reveal details on how it plans to unlock the significant value we see within the Fresenius organizations.

Narrow-moat Fresenius Medical Care turned in third-quarter results that slightly exceeded expectations. However, with ongoing challenges, the firm reduced its 2022 constant currency profit outlook again. While we've tinkered with our near-term assumptions, our long-term view of free cash flow—the key driver of our fair value estimate—has not changed materially. Also, with a new CEO at the helm, we expect the firm to announce value-enhancing initiatives that could take hold in 2023 and beyond. We are keeping our fair value estimate intact, and shares still appear cheap to us.

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.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to be toward the top of that range after a very weak 2021 with similar earnings growth compounded annually during the next five years, if it can get past current inflationary and other challenges.

Shares of U.S. dialysis service providers declined substantially on June 21 after the U.S. Supreme Court offered a surprising decision in the case of Marietta Memorial Hospital Employee Health Benefit Plan versus DaVita. In that decision, the majority of the court ruled that Marietta's decision to keep DaVita (and its key peer Fresenius Medical Care) out-of-network for Marietta's insured population did not break the law since it treated all insurance plan holders equally. As a result of this ruling, we are raising our uncertainty ratings for DaVita and Fresenius Medical Care to high from medium (and keeping Fresenius SE's uncertainty rating at high) since this decision could allow insurers to push outpatient dialysis services out of network for all plan members, including dialysis patients. We suspect such a shift, if unchecked by a statutory language change by Congress for example, could create a significant financial burden on the roughly 10% of U.S. dialysis patients that currently receive treatment through commercial insurance plans and represent the vast majority of U.S. dialysis service-related profits.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares.

Fresenius Medical Care treats end-stage renal disease patients through its dialysis clinic network, medical technology, and care coordination activities. Its strengths in these related areas help Fresenius maintain the leading global position in this market. After pandemic conditions recede, we expect the company to benefit from solid demand in developed markets, such as the U.S., and even faster expansion in emerging markets, such as China, in the long run. With global ESRD patient growth expected to remain in the low to mid-single digits in the long run, we expect top-line growth for Fresenius to be toward the top of that range after a very weak 2021 and even higher earnings growth compounded annually during the next five years, as the firm wrings out more efficiencies and repurchases shares.