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Why Is Hill-Rom Holdings (HRC) Up 3.2% Since Its Last Earnings Report?

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A month has gone by since the last earnings report for Hill-Rom Holdings, Inc. . Shares have added about 3.2% in that time frame.

Will the recent positive trend continue leading up to its next earnings release, or is HRC due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Recent Earnings

Hill-Rom reported second-quarter fiscal 2018 adjusted earnings per share (EPS) of $1.05, reflecting a 19.3% increase from the year-ago quarter. Adjusted earnings surpassed the Zacks Consensus Estimate by 2.9% and were well above the company’s projected range of $1-$1.02.

The strong bottom-line performance was backed by solid core revenue growth, continued margin expansion and strategic investments to drive growth This marked the 11th consecutive quarter of double-digit earnings growth for the company.

Revenue Details

Revenues in the second quarter increased 4.7% year over year to $710.5 million (up 1.8% at CER). The top line also exceeded the Zacks Consensus Estimate of $710 million on momentum in core business, Mortara acquisition and value added from new products.

Geographically, U.S. revenues grew 1% to $466 million while revenues outside the United States increased 12.5% (up 3.5% at CER) to $245 million. Core revenue growth was 2% at CER.

Segmental Performance

In the second quarter, Patient Support Systems revenues dropped 2.2% year over year (down 4.5% at CER) to $355 million. The segment’s domestic revenues declined 5.5%. However, after adjusting for divestitures, U.S. core revenues decreased 5% from the prior year.

Revenues at the Front Line Care segment, which includes Welch Allyn, Respiratory Care and Mortara, increased 12.7% to $238 million (up 10.7% at CER). Apart from gains from Mortara, the performance was driven by contributions from new products, strong growth of thermometry and blood pressure monitoring devices and physical assessment tools plus double-digit growth at respiratory care business.

The Surgical Solutions segment revenues increased 12% (up 5.6% at CER) to $118 million on 18.4% international growth, driven by strong momentum in the Middle East and Europe. U.S. revenues increased 5.4%. The growth was backed by solid uptake of Integrated Table Motion and contribution from products like the iLED7 and the new TS 3000 Mobile Operating Table.

Margins

Reported gross margin in the fiscal second quarter was 49.3%, up 150 bps year over year. Despite a 1.6% increase in cost of revenue, the company witnessed gross margin expansion on account of a 4.7% rise in revenues. Adjusted gross margin grew 130 bps to 49.3% buoyed by the company’s initiatives like portfolio diversification, benefits from cost and sourcing efficiencies and product launches. Adjusted operating margin improved 120 bps to 16.2%.

Outlook

In view of a promising second-quarter performance, Hill-Rom has updated its fiscal 2018 earnings guidance and has also provided the third-quarter estimates.

For the full year, the company continues to expect revenue growth of 3-4% on a reported basis (up 2-3% at CER). Excluding foreign currency, Mortara, divestitures and other non-strategic assets, the company continues to expect core revenue growth of 3%. The Zacks Consensus Estimate for fiscal 2018 revenues is pegged at $2.85 billion.

Hill-Rom now expects adjusted earnings per share for fiscal 2018 in the range of $4.60-$4.65 compared with the previous range of $4.57-$4.65. The Zacks Consensus Estimate for fiscal 2018 earnings is pegged at $4.62, within the company’s guided range.

For the third quarter, Hill-Rom expects revenue growth of around 3% on a reported basis (or approximately 1% at CER). Core revenues are expected to increase 3-4% year over year.  The company expects adjusted earnings per share of $1.12-$1.14. The Zacks Consensus Estimate for third-quarter earnings stands at $1.18 on revenues of $709.9 million. Our consensus estimate for earnings is above the company’s guided range.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been five revisions lower for the current quarter.

Hill-Rom Holdings, Inc. Price and Consensus

VGM Scores

At this time, HRC has an average Growth Score of C, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for value investors than those looking for growth and momentum.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, HRC has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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