Hill-Rom Can Offer 15% Upside

We believe that Hill-Rom Holdings stock (NYSE: HRC), best known for its hospital beds and patient mobility solutions, may be a good buying opportunity at the present time. HRC stock trades near $97 currently and it is, in fact, down 15% so far this year (from $114 at the beginning of 2020). It traded at $109 in February 2020 – just before the coronavirus pandemic hit the world – and it is currently 11% below that level, as well. HRC stock has rallied over 29% since its March lows of $75, underperforming the S&P 500 which gained about 61%. This can be attributed to a sharp decline of 15% in a single trading session after its Q3 earnings announcement in late July. While the earnings were ahead of street estimates, the company’s forecast for the full year EPS was below the analysts consensus, driving the stock price lower. Since then, the stock has remained rangebound even after a Q4 beat. After the correction seen over the recent months, we believe HRC stock can see upside of over 15% from the current levels. Our conclusion is based on our comparative analysis of Hill-Rom stock performance during the current financial crisis with that during the 2008 recession in our interactive dashboard.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 recovers 61% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how HRC stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

Hill-Rom and S&P 500 Performance Over 2007-08 Financial Crisis

HRC stock declined from levels of about $29 in September 2007 (pre-crisis peak) to levels of $10 in March 2009 (as the markets bottomed out), implying HRC stock lost 67%. It recovered post the 2008 crisis, rallying a strong 144% to levels of $24 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

Hill-Rom Fundamentals Over Recent Years Have Been Robust

Hill-Rom revenues increased from $2.7 billion in fiscal 2015 to $2.9 billion in fiscal 2020 (fiscal ends in September), led by an increased demand for hospital beds. Hill-Rom also managed to expand its Net Margins from 2.4% to 7.7% over the same period. This resulted in EPS expansion from $0.83 to $3.35. More recently, the company’s Q4 revenues saw a 10% y-o-y decline due to the impact of the pandemic on the company’s business. The company reported earnings of $0.64 on a per share basis, compared to $0.42 in the prior year quarter, benefiting primarily from lower taxes in the current quarter compared to the prior year quarter.

Does Hill-Rom Company Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

Hill-Rom’s total debt decreased from $2.3 billion in 2016 to $1.9 billion at the end of fiscal 2020, while its total cash grew from $232 million to $296 million over the same period. Hill-Rom generated $482 million in cash from operations in fiscal 2020. Overall, the company has enough liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-October 2020: After poor Q2 results, Q3 expectations were lukewarm, but continued improvement in demand, and progress with vaccine development buoyed market sentiment

As the global economy opens up and lockdowns are lifted in phases, consumer demand is expected to pick up. This could be reflected in the form of a pick-up in revenue toward the end of 2020, followed by revenue growth in 2021, boding well for the HRC stock in the near term.

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