Professional’s Pick 2 – Fisher & Paykel Healthcare Corp Ltd.

Executive Director, Lincoln Indicators
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What is the stock?

Fisher & Paykel Healthcare Corp Ltd. (ASX:FPH)

How long have you held the stock?

Since Feb 2017 ($8.30~).

What do you like about it?

FPH is growing strongly, supported by its intensive R&D pipeline and diverse revenue streams, with exposure to both respiratory care (RAC) and obstructive sleep apnea (OSA) treatments. The sector has strong tailwinds, supported by the global increase in the number of aged and expanding waistlines. We don’t believe this is reflected in the current price.

How is it better than its competitors?

FPH dominates the RAC space, while also quickly growing in the OSA segment, with approximately 15% market share. The products are viewed as better among hospitals/patients, while frequency of new products targeting various age groups (junior products have been a leading success) has been an advantage over its competitors. Margins are also strong, due to a favourable product mix and lower cost manufacturing overheads.

What do you like about its management?

There is a longstanding and confident management team that has a proven track record of delivering and provide good levels of transparency.

What is your target price?

We have a Lincoln valuation of $10.69, which places it as ‘Fair Value’. Consensus is $12.40. Note: We do not use valuation as a driver for stock selection, therefore we are less likely to inflate expectations just to chase price growth. Rather, we prefer to hold quality businesses at a fair price, as we have found the secret to our stock picking success over the long-run is that good things tend to happen to great companies, irrespective of where the price currently sits.

At what point would you sell it?

If FPH broke any of our Star Stock criteria, which are our Golden Rules:

  1. Financial Health.
  2. Management Assessment.
  3. Outlook/Forecast.

These are the metrics we use to identify the great businesses we seek to invest in. Further, should active risks heighten to a point that on balance the risks to the downside exceed the potential risks to the upside, then we will make a risk adjusted call and remove it.

An example of a current active risk that we are monitoring closely is the patent dispute for some of their OSA (Obstructive Sleep Apnea) products with competitor RMD. At present, expected legal charges of NZ$20m-30m in FY19 and similar in FY20 will be incurred. Should we feel costs will blowout, then we may act on the company. For now, we’re comfortable with the allowance.

How much has it added (subtracted) to your overall portfolio over the last 12 months?

12 month total performance to 28/11/2018 (including dividends) of 4.76%. (Outperformance of All Ords Accumulation Index by 4.59%)

Where do you see the value?

The reasons why we are comfortable paying a fair price for FPH is the growing clinical evidence of the benefits of nasal high-flow therapy, which will support demand for their products. Further, the company possesses strong pricing power, due to its significant market share in respiratory and acute products.

Note: Lincoln Indicators, a fund manager and creator of Stock Doctor, holds an interest in FPH.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.

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