Fresenius Medical Care Earnings: Progress Continues as External Pressures Ease

Narrow-moat Fresenius Medical Care FME 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.

In the quarter, the dialysis business turned in results that were mildly higher than expected, as external challenges eased. For example, COVID-19 mortality challenges appear to be dissipating in the dialysis market as pandemic conditions ease, and labor challenges are dissipating in the U.S. market, too. Specifically, revenue grew 6% in constant currency, while adjusted EPS grew 54% in constant currency to EUR 0.59 per share, which was above FactSet consensus of EUR 0.52. The company also generated $854 million in free cash flow in the first half of the year, which was up 47% year over year.

Going forward, management still expects low- to mid-single-digit revenue growth in 2023, and considering recent trends, the company increased its target range for operating profit growth to a flat to mid-single-digit decline (versus flat to high-single-digit decline) for the full year. In the longer run, management still aims to boost adjusted operating margins to between 10% and 14% by 2025 from about 8% in the quarter, primarily by boosting its medical technology margins from a 1% level this quarter and executing on its ongoing cost-savings programs. Our fair value estimate only depends on the firm reaching the bottom end of that target range by 2025, so there could be upside to our fair value if the firm looks likely to make quicker or further progress on the margin front.