Morningstar

Fresenius SE Faces Kabi Challenges in Q4 and Gives Underwhelming 2023 Guidance

Shares remain cheap.

""
Securities In This Article
Fresenius SE & Co KGaA
(FRE)

Narrow-moat Fresenius SE’s FRE weak fourth quarter pushed results mildly below our 2022 expectations on weakness in its Kabi (injectable therapies) business, despite Fresenius Medical Care’s (dialysis) stronger-than-expected results. Also, with continued challenges in dialysis and Kabi, Fresenius SE’s 2023 guidance came in below our expectations. However, when considering cash flows generated in recent months, our EUR 52 fair value estimate has not changed materially, and Fresenius SE shares remain significantly undervalued. While we appreciate Fresenius SE’s intention to hold on to its 32% stake in Fresenius Medical Care until that firm’s intrinsic value can be unlocked, Fresenius SE shares declined after these announcements in part because shareholders may have been hoping for a quicker structural change than appears likely.

In the quarter, Fresenius SE turned in weak results, despite Fresenius Medical Care turning in a decent quarter relative to low expectations. Specifically in the quarter, the dialysis company’s revenue grew 2% in constant currency while adjusted EPS declined only 4% year over year, as coronavirus-related challenges appear to be dissipating somewhat. Going forward, the dialysis company is aiming for flat to a high-single-digit decline in profits for the full year, though ongoing labor concerns may continue cutting into operating margins in 2023, despite solid expected demand.

Beyond dialysis, the Helios hospital business looked solid, but Kabi’s injectable therapies turned in weaker results than we anticipated. Even with revenue growth of 8% in constant currency, Kabi’s adjusted operating profits declined by 15% in the quarter related to increased R&D costs, supply chain disruptions, inflationary pressures, and China challenges. Guidance for 2023 suggests that Kabi’s margin challenges may continue, too, despite expected biosimilar launches in the U.S., creating a headwind in one of the key businesses Fresenius SE aims to focus on in the long run.

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

More in Stocks

Consumer Defensives: Despite Angst, Thirsty Investors Have Names to Pursue

Estee Lauder, Kraft Heinz, and Dollar General are our top consumer defensive stocks.
Erin Lash, CFA

Industrials: Many Stocks Overvalued After Q3 Outperformance

Our top stocks in this sector are Chart Industries, Wesco, and CNH Industrial.
Brian Bernard, CFA, CPA

Basic Materials: Despite Index Rise, We See Multiple Long-Term Opportunities

In this sector, our favored stocks are Albemarle, Dow, and FMC.
Andrew Bischof, CFA and Travis Miller

About the Author

Julie Utterback, CFA

Senior Equity Analyst
More from Author

Julie Utterback, CFA, is a senior equity analyst, AM Healthcare, for Morningstar*. She focuses on medical technology and service companies. She covers managed care organizations including UnitedHealth, service providers like HCA, medical suppliers such as Baxter, and life sciences companies like Danaher. She is also the chairperson of the equity research team’s capital allocation methodology.

Before joining Morningstar in 2005, Utterback was an equity analyst at State Farm Insurance for several years. Utterback joined Morningstar in 2005 as an equity analyst in the healthcare industry, and initially she primarily 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.

Utterback holds a bachelor's degree in finance from the University of Illinois Urbana-Champaign’s Gies College of Business. She also holds the Chartered Financial Analyst® designation.

* Morningstar Research Services LLC (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

Sponsor Center