The year was coming along nicely for Hill-Rom Holdings (NYSE:HRC), one of the world's leading hospital bed manufacturers, when it announced its third quarter earnings on July 27 after the market closed. Included in the financial details for the quarter was a $42 million litigation charge for the potential settlement of an ongoing lawsuit with the federal government alleging Medicare fraud between 1999 and 2007. While Hill-Rom denies any wrongdoing, the news sent its stock down the very next day from the close price of $43.88 on July 27 to $36.25 on July 28. Considering it was as high as $48.80 before the news of the settlement, investors have an opportunity to own its stock at bargain prices. (For related reading, see How To Decode A Company's Earnings Reports.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Fourth Quarter

Q4 revenues grew 7% on a constant currency basis to $431 million, while adjusted diluted EPS was 72 cents, 7% ahead of last year. For the full year, revenues grew 7% on a constant currency basis to $1.59 billion with adjusted diluted EPS of $2.27, which was 29% higher year-over-year. In Hill-Rom's Q4 conference call, CEO John Greisch characterized its year as a good one in which it achieved all of its key objectives for 2011 despite the difficult economic environment in Europe. Excluding $47 million in legal settlements, its operating cash flow of $270 million in 2011 was almost double last year's. Having more free cash in 2011, it repurchased $115.3 million of its stock at an average price of $36.65. Taking advantage of temporary weakness in its stock price, it bought back 1.5 million of those shares at an average price of $30.21 a share. In time, this move should prove to be a wise allocation of capital.

Fiscal 2012

Heading into fiscal 2012, Hill-Rom's North American Acute Care segment has a backlog around 35% higher compared to last year. Despite this good news, management expects to see constant currency revenue growth of between 4% and 5% with adjusted diluted EPS of $2.45 to $2.55. That's a price-to-earnings (P/E) ratio of about 13 times. Clearly, its European business is what's keeping it very conservative in its guidance. If the situation in Europe proves to be better than expected, you're getting an even better deal. At present, management is expecting mid-single digit constant currency growth from its international segment, which is the same as its North American acute care segment. This tells me its business could be stronger than management is letting on. As it stands, Hill-Rom's CFO expects free cash flow of $215 million, which translates into an excellent free cash flow yield of 10.8%. (For more information, read Free Cash Flow Yield: The Best Fundamental Indicator.)




Hill-Rom Holdings


Stryker (NYSE:SYK)


Invacare (NYSE:IVC)


Mindray Medical (NYSE:MR)


PerkinElmer (NYSE:PKI)


New Management

The federal government's lawsuit against Hill-Rom was initiated in 2005. It's taken more than six years to resolve, and although Hill-Rom claims it did nothing wrong, its settlement was substantial. When purported acts of fraud are hanging over a company, its focus has to falter. Litigation is never a good thing. Originally, former CEO Peter Soderberg was intending to retire in April 2011. That was moved up to January 2010 when Hill-Rom hired John Greisch, a former Baxter International (NYSE:BAX) executive. That wouldn't happen unless the board felt there was a void in leadership created by Soderberg's succession announcement. When opportunity knocks, you open the door. As president of Baxter's international division, Greisch and his management team had doubled sales in China and were successfully developing business in other emerging markets when he suddenly resigned in April 2009. Taking some time off to recharge, a quality executive was available, so the process was moved up 15 months. That was a smart decision. I'm guessing one of Greisch's first moves as CEO was to get this litigation behind the company as quickly as possible. Long-term, it is better for the company to move on.

Bottom Line

Hill-Rom announced December 16 it was buying Volker Group, a German-based manufacturer of hospital bed frames, for $85 million. With free cash flow on the rise, look for more of these small, tuck-in acquisitions to boost growth in the future. At today's prices, you're getting a fantastic deal on its stock. It won't be on sale forever. (For related reading, see Stocks Basics: What Causes Stock Prices To Change?)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  2. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  3. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  4. Investing

    The ABCs of Bond ETF Distributions

    How do bond exchange traded fund (ETF) distributions work? It’s a question I get a lot. First, let’s explain what we mean by distributions.
  5. Stock Analysis

    The 5 Best Dividend Stocks in the Healthcare Sector

    Learn about the top five dividend stocks of companies operating in the health care sector that generate substantial cash flows to afford high payouts.
  6. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  7. Investing News

    Are Stocks Cheap Now? Nope. And Here's Why

    Are stocks cheap right now? Be wary of those who are telling you what you want to hear. Here's why.
  8. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  9. Investing News

    These 3 High-Quality Stocks Are Dividend Royalty

    Here are three resilient, dividend-paying companies that may mitigate some worry in an uncertain investing environment.
  10. Stock Analysis

    An Auto Stock Alternative to Ford and GM

    If you're not sure where Ford and General Motors are going, you might want to look at this auto investment option instead.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!