Fisher & Paykel Healthcare invests a hefty chunk of its revenue in research and development. Photo / Dean Purcell
COMMENT:
Fisher & Paykel is one of the best-known "Kiwi" brands, with many New Zealanders having Fisher & Paykel appliances in their homes.
Since 2001 there have been two Fisher & Paykel companies: F&P Appliances continues to manufacture and sell its range of household appliances, while Fisher & Paykel Healthcare has trodden its own path on the global stage. Both were listed on the NZX, with F&P Appliances de-listing in late 2012 as it was acquired by Chinese consumer electronics company Haier.
From this point forward, I'll use "F&P" to talk about F&P Healthcare.
Last column, I discussed the underlying innovation capability inherent in New Zealand. F&P is an exemplar of that unique culture, with nearly all its manufactured products sold outside New Zealand.
The company is justifiably proud of its products that have supported the care of patients with respiratory needs over the past 50 years. But there's no doubt that New Zealand investors have also been taken care of.
From those days of listing in 2001, F&P Healthcare is now so valuable that it is the largest listed company on the NZX. Meridian, Auckland Airport, a2 Milk and F&P Healthcare were all vying for the position at some point over the past year, but F&P's share price growth from $22.20 to $35.74 so far in 2020 (a stellar 61 per cent) has made it no contest. It's now a company with a market capitalisation of over $20 billion, well ahead of a2's $15.6b.
F&P has always been an "expensive" share — as characterised by a high price:earnings ratio (P/E) that in recent years has been around the 40:1 mark. Right now it's much higher: at the current share price of $35.70 and earnings per share (from the latest 2020 results) of $0.50, that means investors are paying a mammoth $71.40 for every $1 that F&P earns.
It is certainly not a share that an investor buys for the dividend yield either — last year's dividend of 27.5c per share is a mere 0.77 per cent of the current share price value.
So how is this attractive to anyone? Well, it's all about growth.
A high P/E is typical of a high-growth company. That's because you're not buying shares for what they earn now; you're buying shares for what they could earn in future.
Fisher & Paykel's current P/E of over 70 is likely to reflect two factors: low interest rates reducing investors' "alternative return" expectations, and relative certainty of F&P's future growth over a longer timeframe (over 3 years, for example, rather than one or two years).
Fisher & Paykel's share price, naturally, is vulnerable to changes in either of those factors.
The "interest rate" factor has generated some comment in recent weeks, particularly in relation to bank term deposits. It's an unlikely bedfellow for F&P, perhaps, but over time, lower interest rates also tend to lower investors' expectations of the returns they expect from companies.
In terms of relative certainty of future growth, consensus forecasts (the average expectations of professional investment analysts) support the hypothesis to some extent.
Fisher & Paykel's current P/E of 71.4 becomes a much less expensive 46.2 in 2023, supported by a forecast rise in net profit from today's $287 million to $446m by 2023.
That does not necessarily translate to professional analysts wholeheartedly supporting the current share price; as any good analyst knows, the further out the timeframe, the greater the uncertainty.
Could you just wait until 2023 and buy the shares at better value then? Possibly, but that doesn't seem to be a bet that investors are placing when it comes to F&P.
There are a few possible reasons for this. Since F&P is investing a significant 9 per cent of its revenue ($118m) in research and development (in other words, inventing new stuff), there's a better than even chance that it will invent its way out of any potential slowdown in sales. There are cultural elements, too — a bias towards research and development, and the supportive "Kiwi" attitude to innovation. After all, high- growth companies (F&P among them) are always looking for the next leg of, well, high growth.
Back to dividends. Fisher & Paykel's recent context has been generating double-digit percentage sales growth each year. Many of its high-growth peers (including a2 Milk and Xero) don't pay any dividend at all. That's because a high-growth company can generate more value by investing its own cash in its operations rather than giving it back to shareholders.
Shareholders (in theory at least) should support this approach; if F&P invests wisely in new opportunities, the share price will grow to compensate for the lack of a dividend.
In that context, it's surprising that F&P pays a dividend at all (although at 55 per cent of net profit, the dividend is significant for the company).
For investors, irrespective of dividend, it is always about working out whether the growth will really occur.
In F&P's case, the growth has been relatively consistent. That may stem from its years within the (then) wider F&P Group stable, allowing it to develop capability and profitability before being launched as an independent listed company.
It's the chart above that investors have bought into all these years; no matter where on the chart an investor has made their decision to invest, the growth in revenue has been considerable. And it has kicked up a gear since 2014, a factor reflected in the climbing P/E ratio since then.
The real question now, as it has ever been, is whether this can continue.
Fisher & Paykel announced its results on June 29th. This followed significant share price growth during the "Covid period", with the shares receiving a further boost when the result was announced. That's down to what F&P actually produces.
Its product range allows hospitals to help support patient care and surgery. Hospital-grade products make up around 63 per cent of its revenue. The product range includes ventilation masks, nasal ventilation products and invasive ventilation products to help support patients' breathing.
Most of its remaining revenue is derived from the manufacture of in-home respiratory solutions, with a focus on adapting its hospital-grade solutions to allow them to be used easily and comfortably in a home setting.
Fisher & Paykel is at pains to point out that the company was on track to significantly improve its performance in 2020, before the advent of Covid-19. Chief executive Lewis Gradon, in the company's annual report, notes that a significant increase in demand for its hospital-grade products began in February, towards the end of the financial year.
In a somewhat macabre manner, this bodes well for F&P Healthcare in 2021, as the Covid-19 pandemic continues. Fisher & Paykel's sales are almost entirely outside of New Zealand, so the company is likely to see further benefit as global health systems manage the Covid-19 response around the world.
All of this provides some form of solid underpinning to the F&P share price, and the enormous expectations implied by a price:earnings ratio of over 70. But the very fact that investors are prepared to pay so much for a quality company also reflects the broader macroeconomic environment.
There's a lot of good that F&P's management have done to create its growth momentum. But like everyone, the company is also susceptible to shocks (positive or negative) outside its control.
Fisher & Paykel has benefited from the sudden unexpected demand for its products caused by a global pandemic that most would not have predicted a year ago. On the flip side, its investors may suffer in future should global economic growth resume and competition for funds pushes up interest rates (unlikely as that might seem right now).
Even I'm not sure whether to worry about this right now. Nonetheless, rightly or wrongly, it is likely that the support for global shares since late April is simply a rational manifestation of the dramatic declines in interest rates that have occurred around the world and the corresponding positive impact on share valuations.
Including that of F&P Healthcare.
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