Fiduciary Management Inc., an investment management firm, published its “International Equity” first quarter 2021 investor letter – a copy of which can be downloaded here. A return of 7.2% (currency hedged) was reported by the FMI International portfolios for the Q1 of 2021, compared to its MSCI EAFE benchmark that delivered a 7.59% return in local currency (LOC) and 3.48% in U.S. Dollars (USD) over the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Fiduciary Management, in their Q1 2021 investor letter, mentioned Fresenius Medical Care AG & Co. KGaA (NYSE: FMS) and shared their insights on the company. Fresenius Medical Care AG & Co. KGaA Limited is a Bad Homburg, Germany-based kidney dialysis centers company that currently has a $22.2 billion market capitalization. Since the beginning of the year, FMS delivered a -8.76% return, while its 12-month gains are up 8.16%. As of April 15, 2021, the stock closed at $37.92 per share.
Here is what Fiduciary Management has to say about Fresenius Medical Care AG & Co. KGaA in their Q1 2021 investor letter:
“Fresenius Medical Care is the #1 global provider of products and services for patients with chronic kidney failure and end stage renal disease (ESRD), providing over 53 million dialysis treatments to about 350,000 patients annually. Fresenius equipment (with more than 11,000 patents) and related products are used to treat more than half of worldwide dialysis patients; the company operates a global network of about 4,100 outpatient dialysis clinics in the U.S. (2,600) and about 50 other countries (1,500). In 2020, Fresenius revenue was €17.9 billion with €14.1 billion (79%) from Services and €3.7 billion (21%) from Products. This understates the size of its razor and blade-type products business, as Fresenius always eliminates intercompany revenue.
Good Business
• In 2019, the number of worldwide dialysis patients grew to 3.5 million, up 6% year-over-year, in line with the long-term average. In 2020, COVID-related excess mortality contributed to slower-than-expected worldwide patient growth of just 3%.
• Fresenius Medical and DaVita, Inc. are the low-cost providers in the U.S., accounting for just over 80% of treatments in the $25 billion U.S. dialysis services industry ($30-$40 lower cost per treatment).
• While Fresenius and DaVita have historically had significant influence over pricing from private insurers, they are mostly price-takers from Medicare.
• Treatment is necessary several times a week and clinic utilization is high, with limited excess capacity nationwide.
• About 88% of patients receive in-center treatment with 12% receiving treatment at home (increasing).
• The U.S. market is shifting toward home treatment (more profitable and less capital intensive) and coordinated care models (value-based care), which will sometimes entail broader patient healthcare cost risk in exchange for greater oversight. In 2021, Medicare Advantage is newly mandated to provide broad access to care for ESRD and these negotiated rates are often 10 percentage points higher than traditional Medicare.
• The company’s internal ROIC was 6% for 2020, with one-third of long-term executive compensation tied to increasing this ROIC level 100-150 basis points by 2025. If adjusting for goodwill (because industry consolidation is mostly behind us) the underlying tangible ROIC is in the mid-to-upper teens.
• 2020 Net debt-to-EBITDA11 finished at 2.7 times, with a 2.3% weighted average cost of debt.Valuation
• Fresenius shares trade for a mid-teens multiple of 2020, and 2021 EPS estimates. The roll-off of COVID related costs and a return to something like conventional patient growth during 2022 should result in a meaningful earnings rebound (making the stock attractive in absolute terms) and represents a large discount to medical technology sector averages.
• Fresenius’ shares are more than 30% below their early 2018 highs, and its enterprise value-to-sales ratio is 1.5 times, versus the 5-year average of 1.8 times. Despite advantages from larger scale, vertical integration, and a stronger international footprint, the stock’s historical premium to DiVita has recently become a discount.Management
• Chief Executive Officer Rice Powell has been with Fresenius for 24 years. During his tenure, patient outcomes have improved. With U.S. dialysis service consolidation via mergers and acquisitions largely in the rearview mirror, Mr. Powell has made several investments in home dialysis, related chronic kidney disease treatments, and care coordination that should advantage the company in the future. ROIC was added to the compensation plan in 2016 and a €1 billion buyback was announced in 2019.
Investment Thesis
Fresenius Medical is a dependable top-line grower with low exposure to the typical business cycle. Despite the pandemic, it grew in 2020 and increased its dividend more than 10%. That said, unlike medical technology peers who saw their most severe COVID-related business impact from deferred procedures in the middle of 2020, the company will see the greatest business impact throughout 2021 from excess mortality in its patient population. A difficult 2021 outlook has resulted in an interesting multi-year investment opportunity, as COVID-related costs begin to roll off later this year, the dialysis services patient population resumes growth in 2022, and the company begins to adjust its clinic and cost base as necessary. While investments in Care Coordination and Home Dialysis contributed to recent margin compression, these same investments, along with expanded Medicare Advantage coverage, should contribute toward improving financial metrics and multiple expansion back towards historical averages.”
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Our calculations show that Medical Care AG & Co. KGaA (NYSE: FMS) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, Medical Care AG & Co. KGaA was in 9 hedge fund portfolios. FMS delivered a -9.17% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
