History, Business: Fresenius Medical Care (FMS, Financial), or FMC for short, is an offshoot of Fresenius SE & Co., which traces its roots to a pharmacy founded in 1462. The Fresenius family assumed ownership in the 18th century and the newly acquired factory started producing dialysis machines in 1979. FMC was founded in 1996 after a merger of Fresenius Worldwide Dialysis and National Medical Care.
The company grew organically as well as through acquisitions. It acquired Renal Care in 2006, and then IDC, Liberty Dialysis Holdings Inc. and American Access Care in 2011.
FMC is the world’s largest provider of product and services for dialysis. Dialysis is a blood filtering therapy which replaces vital kidney functions for patients that are suffering from chronic kidney failure. The company also produces dialysis products like hemodialysis machines, dialyzers and related disposable products.
FMC’s customers are state-owned or public health insurers, private health insurers and companies. The company’s largest private customer is DaVita (DVA, Financial), which is also the second largest dialysis service provider in the U.S. after FMC. FMC generated 1% of its revenue from DaVita.
Following is the number of patients treated in 2012, as compared with other dialysis companies.
Another Berkshire (BRK.A)(BRK.B) holding, DaVita holds second position in the U.S., after FMC. Following is the revenue by geographical regions.
FMC has been growing quite nicely with a CAGR of 9%. The growth has been aided by acquisitions, mainly in the US.
Dialysis is a business which is mostly unaffected by the vagaries of the economy. It has captive customers and a predictable revenue and cash flow stream. Looking at the graph of margins (gross, operating, net) confirms our theory.
As we see, margins have been very consistent and there is an upward trend in the net margin.
Finances
With predictable cash flows and non-cyclicity of the business, FMC can afford to take on more debt than usual. This is exactly what it has done over the years. The net debt has been going up significantly, mainly due to acquisition.
The total debt/EBITDA ratio is comparable to high capex industries like utilities. Nevertheless, the company has good interest cover of more than 5. The company does pay a very high interest of $426 million.
On the balance sheet perspective, the company is not in trouble unless it makes more acquisitions in the near future. It would not be safe for it to go much above the debt/EBITDA ratio of 3.
Shares
The company has two classes of shares: ordinary and preferred. There are 302.76 million ordinary shares and 3.97 million preferred ones. Fresenius SE & Co. KGaA holds about 31.2% of the ordinary shares. The rest are free float.
The company has been very shareholder friendly. It has not diluted the shareholders and has increased its dividend at quite a fast pace. Following is the dividend development.
And this is the shares outstanding graph.
Meanwhile, the book value has also improved quite a bit in the last 10 years.
All in all, the company has performed admirably from the perspective of the shareholders.
The company has changed its dividend policy this year. Instead of growing the dividend at 50% of the earning growth, the management has decided mirror the growth rate. The shareholders will now see dividends grow as fast as the earnings.
This means that the company feels that it has less opportunities for the cash it is generating. It is in some sense a good sign. I am not very comfortable with the debt load.
Management
The company has been managed quite well. As we saw, the margins, revenue and the shareholder returns all point to a well managed company with shareholder-friendly management.
The business has also been marked by good cash flows and increasing FCF. The graph below is self-evident.
The only gripe is the way the management treats the debt. After successfully issuing a debt of nearly $9 billion ($5 billion in bonds and $4 billion in credit agreements) over the last 24 months, the management seemed quite ecstatic about it. They painted this as a “good thing,” i.e. a continued trust of the capital markets in its business.
The company has also seen a very small number of CEOs — which is great. A stable management is good for a business — if they are performing well. Ben J. Lipps was CEO for 14 years and only in Jan 2013 he was succeeded by the new CEO Rice Powell.
The last CEO was quite acquisitive. His acquisition expense was [bizjournal] $1.6 billion in 2012, and $1.7 billion in 2011.
High debt load which the management thinks is fine because of predictable cash flows.
Regulation is one major risk. The company operates in a highly regulated environment. Changes is law, especially in terms of reimbursements can have major impact of FMC’s business and strategy.
Another risk is protecting its technology from its competitors. There is inadequate protection in the form of patents of products and technologies developed by the company.
Valuation
The company has an EV of $29 billion and FCF of $1.3 billion. Given that the cash flows are quite predictable and stable, we can use the DCF model.
At current prices the market is assuming 10% growth rate for the next 10 years and no growth afterwards calculated at 10% discount. This will give a value of $28 billion — which is close enough.
Using the Dividend Discount Model does not give any better results.
The company is priced for near 10% growth for the next 10 years. Not cheap.
Additional Disclosure: The company is expensive in my opinion. The current price reflects an intrinsic 10% growth rate assumption for the next 10 years. It might achieve this — but paying for growth is not something I will recommend. On a quick analysis DaVita (DVA) seems priced in a similar way. It has debt/equity of 2.2, market cap of $13 billion and FCF of $550 million. Running it through the models gives similar growth assumptions.
The company grew organically as well as through acquisitions. It acquired Renal Care in 2006, and then IDC, Liberty Dialysis Holdings Inc. and American Access Care in 2011.
FMC is the world’s largest provider of product and services for dialysis. Dialysis is a blood filtering therapy which replaces vital kidney functions for patients that are suffering from chronic kidney failure. The company also produces dialysis products like hemodialysis machines, dialyzers and related disposable products.
FMC’s customers are state-owned or public health insurers, private health insurers and companies. The company’s largest private customer is DaVita (DVA, Financial), which is also the second largest dialysis service provider in the U.S. after FMC. FMC generated 1% of its revenue from DaVita.
Following is the number of patients treated in 2012, as compared with other dialysis companies.
Another Berkshire (BRK.A)(BRK.B) holding, DaVita holds second position in the U.S., after FMC. Following is the revenue by geographical regions.
FMC has been growing quite nicely with a CAGR of 9%. The growth has been aided by acquisitions, mainly in the US.Dialysis is a business which is mostly unaffected by the vagaries of the economy. It has captive customers and a predictable revenue and cash flow stream. Looking at the graph of margins (gross, operating, net) confirms our theory.
As we see, margins have been very consistent and there is an upward trend in the net margin.
Finances
With predictable cash flows and non-cyclicity of the business, FMC can afford to take on more debt than usual. This is exactly what it has done over the years. The net debt has been going up significantly, mainly due to acquisition.
The total debt/EBITDA ratio is comparable to high capex industries like utilities. Nevertheless, the company has good interest cover of more than 5. The company does pay a very high interest of $426 million.
On the balance sheet perspective, the company is not in trouble unless it makes more acquisitions in the near future. It would not be safe for it to go much above the debt/EBITDA ratio of 3.
Shares
The company has two classes of shares: ordinary and preferred. There are 302.76 million ordinary shares and 3.97 million preferred ones. Fresenius SE & Co. KGaA holds about 31.2% of the ordinary shares. The rest are free float.
The company has been very shareholder friendly. It has not diluted the shareholders and has increased its dividend at quite a fast pace. Following is the dividend development.
And this is the shares outstanding graph.
Meanwhile, the book value has also improved quite a bit in the last 10 years.
All in all, the company has performed admirably from the perspective of the shareholders.
The company has changed its dividend policy this year. Instead of growing the dividend at 50% of the earning growth, the management has decided mirror the growth rate. The shareholders will now see dividends grow as fast as the earnings.
This means that the company feels that it has less opportunities for the cash it is generating. It is in some sense a good sign. I am not very comfortable with the debt load.
Management
The company has been managed quite well. As we saw, the margins, revenue and the shareholder returns all point to a well managed company with shareholder-friendly management.
The business has also been marked by good cash flows and increasing FCF. The graph below is self-evident.
The only gripe is the way the management treats the debt. After successfully issuing a debt of nearly $9 billion ($5 billion in bonds and $4 billion in credit agreements) over the last 24 months, the management seemed quite ecstatic about it. They painted this as a “good thing,” i.e. a continued trust of the capital markets in its business.
The company has also seen a very small number of CEOs — which is great. A stable management is good for a business — if they are performing well. Ben J. Lipps was CEO for 14 years and only in Jan 2013 he was succeeded by the new CEO Rice Powell.
The last CEO was quite acquisitive. His acquisition expense was [bizjournal] $1.6 billion in 2012, and $1.7 billion in 2011.
The German parent company plans to buy Mercer Island, Wash.-based Liberty Dialysis and Renal Advantage for $1.7 billion including assumed debt, and Glen Rock, Penn.-based radiology center operator American Access Care Holdings LLC for $385 millionRisks
High debt load which the management thinks is fine because of predictable cash flows.
Our investment and financing strategy did not change substantially in the past financial year. This is also due to our business model, which is based on stable and high cash flows, allowing a more consistent and higher level of debt than might be the case in other industries. We still regard our refinancing options as being very stable and flexible. We have successfully renewed our revolving credit facility in October 2012. In the current financial year, the focus of our investing activities is on our dialysis services business, with an emphasis on expanding our global dialysis clinic network.Not so much risk associated with economic problems.
Regulation is one major risk. The company operates in a highly regulated environment. Changes is law, especially in terms of reimbursements can have major impact of FMC’s business and strategy.
Another risk is protecting its technology from its competitors. There is inadequate protection in the form of patents of products and technologies developed by the company.
Valuation
The company has an EV of $29 billion and FCF of $1.3 billion. Given that the cash flows are quite predictable and stable, we can use the DCF model.
At current prices the market is assuming 10% growth rate for the next 10 years and no growth afterwards calculated at 10% discount. This will give a value of $28 billion — which is close enough.
Using the Dividend Discount Model does not give any better results.
The company is priced for near 10% growth for the next 10 years. Not cheap.
Additional Disclosure: The company is expensive in my opinion. The current price reflects an intrinsic 10% growth rate assumption for the next 10 years. It might achieve this — but paying for growth is not something I will recommend. On a quick analysis DaVita (DVA) seems priced in a similar way. It has debt/equity of 2.2, market cap of $13 billion and FCF of $550 million. Running it through the models gives similar growth assumptions.
