Tariff Pressures And Slowing Hospital Adoption Will Constrain Long-Term Earnings Trajectory

Catalysts

About Fisher & Paykel Healthcare

Fisher & Paykel Healthcare designs, manufactures and markets respiratory care and home care medical devices and consumables used in hospitals and at home.

What are the underlying business or industry changes driving this perspective?

• Intensifying competition and faster innovation cycles in obstructive sleep apnea masks and hardware could compress pricing and slow adoption of new product ranges such as Nova Nasal and Airvo 3, which may limit revenue growth in Home Care and erode gross margin expansion.
• Ongoing and potentially widening tariff regimes on products manufactured in New Zealand and possibly Mexico create a risk that a currently manageable headwind becomes a structural cost burden that outpaces efficiency gains, capping future gross margin and operating margin progression.
• Greater reliance on elevated respiratory illness seasons and high flu incidence to sustain current hospital consumables growth rates increases the chance that a normalizing or weaker season drives a sharp slowdown from recent double digit growth, adding pressure to revenue and earnings volatility.
• Hospitals may take longer than expected to fully adopt guideline based nasal high flow and humidified NIV across all care settings. As a result, the large theoretical penetration runway could become a protracted, resource intensive conversion process that weighs on sales productivity and SG&A leverage.
• Rising capital intensity from new buildings, land purchases and manufacturing expansion, combined with modestly growing R&D and SG&A, could outstrip organic earnings growth if top line momentum moderates. This may lead to lower free cash flow conversion and could constrain future dividend growth.

Assumptions

This narrative explores a more pessimistic perspective on Fisher & Paykel Healthcare compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Fisher & Paykel Healthcare's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 20.2% today to 21.7% in 3 years time.
• The bearish analysts expect earnings to reach NZ$623.1 million (and earnings per share of NZ$1.05) by about December 2028, up from NZ$437.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$737.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 34.8x on those 2028 earnings, down from 50.3x today. This future PE is lower than the current PE for the NZ Medical Equipment industry at 50.3x.
• The bearish analysts expect the number of shares outstanding to grow by 0.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Hospital and Home Care demand is growing at double digit rates, with first half operating revenue up 14% and hospital and home care revenues up 17% and 10% respectively. If this is sustained, it would support continued expansion in revenue and earnings rather than a prolonged decline.
• Structural shifts in clinical practice towards nasal high flow and humidified NIV, supported by large scale studies and growing clinical guidelines, are driving what management characterizes as a consistent ongoing change in practice. This can underpin durable consumables growth and support long term revenue visibility.
• Ongoing gross margin improvement initiatives, including thousands of manufacturing efficiency projects and some pricing gains, have already lifted gross margin to 63%. These initiatives are expected to more than offset current tariff headwinds, which could maintain or expand net margins despite external cost pressures.
• A strong balance sheet with net cash of $237.8 million, negative gearing, and continued investment in capacity and R&D at around 10% of revenue positions the company to fund growth opportunities and product innovation. This may support long term earnings rather than compress them.
• Guidance for full year operating revenue of $2.17 billion to $2.27 billion and net profit after tax of $410 million to $460 million, combined with dividend growth and foreign exchange tailwinds, indicates that management expects continued profit expansion. This may support the share price through higher revenue, stable operating margins and rising earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Fisher & Paykel Healthcare is NZ$29.31, which represents up to two standard deviations below the consensus price target of NZ$39.33. This valuation is based on what can be assumed as the expectations of Fisher & Paykel Healthcare's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$46.0, and the most bearish reporting a price target of just NZ$28.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be NZ$2.9 billion, earnings will come to NZ$623.1 million, and it would be trading on a PE ratio of 34.8x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of NZ$37.44, the analyst price target of NZ$29.31 is 27.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.