CareFusion Corporation (CFN) is a medical technology company engaged in improving the healthcare industry. It operates through two segments and has multiple products, marketed worldwide. The company is cash flow positive and is financially sound to sustain its extended operations.
The Business
CareFusion is a global medical technology corporation that provides healthcare products and services, aiming towards the quality, safety, cost and efficacy of healthcare. The primary areas of focus include infection prevention, medication management, respiratory care, operating room effectiveness, and surveillance and analytics. The products are being used in healthcare facilities in the U.S. and almost 130 countries worldwide. It has over 15,000 employees, with almost 6,100 employees in the U.S. alone. CareFusion has over 25,000 worldwide customers that include hospitals, governments, insurance providers, long term care facilities, surgery centers, and outpatients and ambulatory clinics.
The company operates through two business segments viz. Medical Systems and Procedural Solutions. Through these two segments the company provides almost 24 brands, under its core focus areas. It also develops supporting software and technologies that help better management of patients' records and medications. Additionally, the company also participates in charitable giving through its CareFusion Foundation, to support organizations improving the healthcare system.
CareFusion faces competition relevant to its business lines, such as for the Medical Systems segment it competes with Baxter International Inc. (BAX), Hospira (HSP), Omnicell Inc. (OMCL), Dragerwerk AG & Co., among others. While the competitors for the Procedural Solutions segment are 3M Company (MMM), Becton, Dickinson & Co. (BDX), C.R. Bard Inc. (BCR), Smiths Medical, Telefex (TFX), and Integra LifeSciences (IART).
Business Segments
The company primarily operates through its two business segments, with 63.1% revenue attributed to Medical Systems, and 36.9% attributed to the Procedural Solutions segment.
The medical Systems segment is primarily organized around the medical equipment business lines. These business lines within the segment include Respiratory Technologies, Infusion Systems and Dispensing Technologies. The Respiratory Technologies include respiratory ventilators and other respiratory accessories. The Infusion Systems include infusion pumps and disposable infusions sets. The Dispensing Technologies business line consists of equipment and services for medication and supply dispensing.
The Procedural Solutions segment is structured around the reusable surgical instruments and disposable products business lines. These business lines include Specialty Disposables, Medical Specialties, and Infection Prevention. The Specialty Disposables include oxygen masks, and disposable ventilator circuits, for use in respiratory therapy. Medical Specialties include reusable surgical instruments and interventional specialty products. Infection Prevention includes disposable IV infusion sets and accessories, skin antiseptic and other patient preparation products.
Acquisitions
The company acquires relevant businesses as part of its growth strategy and has made a total of eight acquisitions since the year 2010. These acquisitions have helped the company to expand its product portfolio. These acquisitions include Medegen, a manufacturer of needleless IVs, in May 2010; Vestara, a technology solutions developer for managing pharmaceutical waste, in April 2011; Rowa, a company focused on robotic medication storage systems, in August 2011; PHACTS, a consulting and technology company for streamlining operations, in April 2012; UK Medical Holdings, distribution company in U.K., in June 2012; Intermed, a respiratory technology company, in November 2012; Grupo Sendal S.L., infusion specialty disposable manufacturer, in October 2013; and Vital Signs, GE's Healthcare division for anesthesia and respiratory consumables, in November 2013.
Products
The company has a number of products, which are supported with technology allowing them to function better and produce error free results. The product categories are illustrated below, which include a number of relevant products and brands.
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Source: CareFusion Website
The company has a total of 24 brands, which are categorized among the core focus areas, as illustrated in the image below. These brands cover a number of products relevant to their focus area.
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Source: CareFusion Website
The leading products of the company include Pyxis for automated dispensing and patient identification, infusion pumps Alaris, data mining surveillance MedMined, skin preparation ChloraPrep, surgical instruments V. Mueller, and respiratory and ventilation products AirLife, AVEA, and LTV series.
Market Performance
The company has a year to date performance of 34.7%, with only 0.8% increase in the past three months. The share price of the company has not witnessed major rallies during the year despite positive news, but has grown steadily.
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Source: Yahoo! Finance
The shares of the company were recently downgraded by Goldman Sachs, from a Neutral to Sell rating, and the price target was reduced from $36 to $35. The shares have been trading above the price target for an extended period, however following the downgrade they slipped approximately 2.53%. Overall, the company now has ten analysts rating it a buy, five rating it a neutral and one rating it a sell, with the consensus rating of Buy. The average price target is $32.20, with the high rating of $40 (Deutsche Bank) and the lowest target of $28 (Barclays).
Upcoming Events
The company has listed its upcoming events through June of 2014, which include various conferences related to the company's line of business. The upcoming events include Society of Thoracic Surgeons from January 25 to January 29, 2014; Arab Health from January 27 to January 30, 2014; and Medtrade Spring from March 10 to March 11 2014, among others. These events are expected to have a positive impact on the share prices.
Fundamentals and Potential Risks
The company reported $830 million in revenue in the first quarter of fiscal year 2014, a 1% decrease from the first quarter of fiscal 2013. The revenue included $524 million of revenue from the Medical Systems business segment and $306 million from the Procedural Solutions segment. Additionally, the company also has a $750 million share repurchase program and repurchased 3.3 million shares worth of $121 million in the recent quarter.
The company ended the previous quarter with cash and equivalents of $1.77 billion, which combined with positive cash flows is more than sufficient to fund the operations of the company for an extended period. However, the company does have a debt of $1.45 billion, which will require interest payments and fulfilling other costs associated to it.
The company has operations outside of U.S. which exposes it to the risk of foreign currency fluctuations. The strengthening of the dollar has the potential to harm the ex-U.S. revenues of the company.
Also to note is that CareFusion is currently operating under an FDA consent decree related the infusion pump business in the U.S. Originally, the consent decree only included Alaris SE pump in 2007, however later in 2009 all infusion pumps of the company were included. This poses as a major risk to the firm as the quality of the pumps is under scrutiny, with the company currently in audit inspection phase of the decree. In case the FDA doesn't deem the products compliant with the decree it can order the company to cease manufacturing or even recall the products from the market, among other actions. Along with this the company may be required to pay $15,000 per day per violation and up to $15 million a year. And not to mention the adverse effect it would have on the public image of the company.
The company is also under government investigation for the sales and marketing practices of the ChloraPrep product, and the company's relations with healthcare professionals. The company in April of this year announced a $41 million settlement payment for the allegations, subject to terms. However, the investigation hasn't yet been settled and the company doesn't have a clue as to when it will be finally settled. This does pose a risk to the company, such as the government may not settle and continue the investigation, which might have detrimental effect on the operations.
Bottom-line
CareFusion is a large corporation with expanded operations, and is earning major revenues. It has multiple products that have the potential to improve patient care and the healthcare industry procedures. The global footprint gives the company to reap profits and the growth through acquisition strategy of the company also proves to be beneficial.
All in all, the company is a fair and relatively stable investment. It has been growing steadily, without major rallies, as is seen in other companies in the industry. One of the reasons may be attributed to the low short interest ratio of 1.40 and days to cover of 1.3. This low short ratio and shorter days to cover doesn't have a pronounced effect, when the shares spike. On the contrary, the short ratio is also a positive indicator for the company, suggesting that the investors are optimistic regarding the company. Furthermore, the series of upcoming events may prove to be positive catalysts for the share prices, in advent of positive news relayed.
However, the company must be evaluated for the risks before investment, as they may pose a threat to the operations. Despite these risks the share price has a significant upside based on analyst estimates. Thus, in my opinion the company is a fair long term investment but only advisable for knowledgeable investors with an appetite for risk.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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