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Fresenius Medical Care Earnings: Underlying Growth and Margin Improvement Boost 2023 Outlook

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In a positive development, narrow-moat Fresenius Medical Care FME 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.

In the quarter, the dialysis business turned in results that were mildly higher than expected, as external challenges dissipated and cost saving programs continued. For example, COVID-19 mortality challenges appear to be waning in the dialysis market as pandemic conditions ease. Also, labor challenges are declining. Specifically in the quarter, revenue grew 7% in constant currency, while adjusted EPS grew 5% in constant currency to EUR 0.57 per share, which was above FactSet consensus of EUR 0.54. The company also generated EUR 1.5 billion in free cash flow in the first half of the year, which was up 37% year over year.

Going forward, management still expects low- to mid-single-digit revenue growth in 2023, and considering recent trends, Fresenius increased its target for 2023 operating profit growth to the low single digits, up from flat to a mid-single-digit decline previously. In the longer run, management still aims to boost adjusted operating margins to between 10% and 14% by 2025 from about 9% in the quarter by increasing its medical technology margins from 2% this quarter (2025 goal of 8% to 12%), executing on its ongoing cost-savings programs, and potentially boosting its services segment margin from 10% in the quarter (2025 goal of 10% to 14%). Our fair value estimate only depends on the firm reaching the bottom of the overall target range of 10% to 14% by 2025 and less than the top end of its goal by 2027, so there could even be upside to our fair value if the firm looks likely to make quicker or further progress on the margin front.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Julie Utterback

Senior Equity Analyst
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Julie Utterback is a senior equity analyst for Morningstar Research Services LLC, a wholly owned subsidiary of Morningstar, Inc. Within the healthcare industry, she covers medical technology and service companies. She is also the chairperson of the equity research team’s capital allocation methodology.

Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry. At that time, she covered medical technology companies, including orthopedic device, medical equipment, and cardiac device firms. In 2010, she joined Morningstar's credit research team, initiating coverage of the entire healthcare industry and generally helping the organization expand and maintain its credit coverage across many industries. She held that senior credit analyst role until April 2019, when she returned to the equity team to cover medical technology and service companies.

Prior to joining Morningstar, Utterback was an equity analyst at State Farm Insurance for several years. She holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign. She also holds the Chartered Financial Analyst® designation.

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