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Hill-Rom (HRC) Poised on Organic Growth, Long-Term Targets

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On Nov 6, 2015, we updated our research report on medical device company Hill-Rom Holdings, Inc.HRC . We are impressed with Hill-Rom's recently announced long-term growth strategies and key initiatives that are awaiting implementation. Notably, the growth targets take into consideration the two latest major acquisitions by Hill-Rom - Welch Allyn and Trumpf Medical.

Hill-Rom currently plans to focus on revenues, margin and earnings expansion. It believes these targets can be primarily achieved through alliances with health care customers, business partners and other key constituencies based on global sales channel and service capabilities.

Apart from investment in research and development for differentiated product launches, an improvement in sales and marketing initiatives is also in the cards. Moreover, the company targets optimization of its manufacturing footprint, acceleration of product rationalization, reduction of supply chain costs and diversification of product portfolio with strong capital allocation.

Based on the aforesaid initiatives, Hill-Rom has set its long-term financial goals (till fiscal 2018). The company projects revenue increase from its organic activities in the range of 3-5% annually at constant exchange rate or CER, with adjusted operating margin expansion in the range of 450-550 basis points (including the accretive benefit of the Welch Allyn acquisition). Adjusted earnings per share (EPS) CAGR is expected in the mid-to-high teens compared with fiscal 2015 EPS projection. Cumulative operating cash flow is expected to be more than $1 billion. The company has also updated its guidance for fiscal 2015.

We note that, Hill-Rom's $2.05 billion Welch Allyn acquisition is a strategic fit as it has combined the company's leading position in hospitals and operating rooms worldwide with Welch Allyn's prominence in point of care diagnostics and testing. The newly formed entity will have a larger global reach, with operations in 30 countries worldwide. Meanwhile, the acquisition of Trumpf Medical too strategically fits Hill-Rom's core growth strategies.

Apart from acquisition-related growth, Hill-Rom is also focusing on expansion through innovation, as reflected by the company's rising trend of research and development spending. Through fiscal 2015, the company introduced several new products, which jointly contributed 7% organic growth at CER.

However, the operating margin scenario at Hill-Rom is a tad disappointing, and reflects the high cost burden the company is suffering. Moreover, unfavorable currency movement was a major dampener during the quarter and the company expects the dullness to persist through the next fiscal. It expects negative currency impact to impact fiscal 2016 revenues by 3-4%.

The stock currently sports a Zacks Rank #1 (Strong Buy).

Key Picks from the Sector

Some other medical product stocks worth a look are Diadexus, Inc. DDXS , Nxstage Medical, Inc. NXTM and SurModics, Inc. SRDX . All the three stocks also sport a Zacks Rank #1.

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SURMODICS (SRDX): Free Stock Analysis Report

DIADEXUS INC (DDXS): Free Stock Analysis Report

NXSTAGE MEDICAL (NXTM): Free Stock Analysis Report

HILL-ROM HLDGS (HRC): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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