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FPH - FISHER & PAYKEL HEALTHCARE CORPORATION LIMITED


Lizard
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One of the frustrations of holding "blue chip" NZ stocks is the extent to which most of them end up being knocked around by currency movements. For those such as Tenon and Fisher & Paykel Healthcare with a large proportion of revenues incurred in the US against substantial costs in NZD, the currency movements are magnified in the movement of profit margins. Given that forex movements often seem to be the least predictable of markets to me, I tend to assign more risk to companies with higher exposure.

 

Right now, based on current earnings and forecasts, FPH still looks expensive, with a P/E of 40 on current price of $2.67 and a forecast for more of the same at earnings level. However, this presumes an adherence to the view that the US dollar is doomed to stay at the current extreme levels against the NZD. Now it doesn't seem to matter where the cross rate is, there will always be someone moaning about it and about 18 months ago, I remember Tenon lamenting the unexpected strength at 0.67 and benchmarking their "mid-cycle" conditions at 0.60 (a number I've always used in the past too). So what is FPH basing their forecasts on?

For the 2009 financial year the company expects a continuation of strong underlying revenue growth across its product range and expects that operating revenue will grow about 15% in US dollar terms to approximately US$310 million.

 

At an average NZD:USD exchange rate of 0.80 the company expects to achieve operating revenue of approximately NZ$388 million and an operating profit similar to that achieved for the year ended 31 March 2008. At an average NZD:USD exchange rate of 0.75 the company expects to achieve operating revenue of approximately NZ$415 million and an operating profit increase of approximately 20%.

 

It is probably not quite correct to say that if a move in the exchange rate of .05 can increase profits by 20%, then a move of .15 will increase profits by 60%...but it might be close enough in magnitude to consider what happens if the NZ currency falls back to what I'd call "high-normal" at 0.65 against the USD... suddenly the forward P/E drops to 25 and the PEG moves to .69. To be fair, perhaps 0.70 average could be a more likely possibility - for a 40% increase in profit, a P/E of 28.5 and PEG of around 1.

 

Does that make FPH too cheap to pass up? Hardly yet in my books. I'd prefer to see a forward P/E max of around 20-25 at these levels with current growth rates and debt levels. When they were in the high $3, I valued them at $2.80 and said I'd consider them close to $3... now they're below that level and I'm going to do that despicable analyst trick of lowering my target further... my valuation is now $2.11, but I'd give consideration to buying at $2.35

 

 

 

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Half year result out today - on track for $60m NPAT if exchange rate can hang around at 0.55 levels. (Wow, that is a good bit lower than the levels in my last post of August!)

 

Okay, it's a good result, but I still feel FPH is priced too generously at current levels ($3.08). Sure the growth is great, but they already have a pretty good ROIC - and since they are paying out profit-and-some in dividends then new invested capital to increase returns is all coming from debt for now, so I'm not certain how much more growth they can keep funding from the balance sheet - although debt isn't excessive.

 

I guess defensive attributes of healthcare makes them seem a safer pick. And in the mid-term the earnings trend is often more relevant to share price than absolute earnings themselves.

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