Description

Siemens IPO'd their healthcare dividivsion in March of 2018. It was a partial IPO (~15%) but overtime they will sell the rest of their stake. While I don't think this is a screaming bargain -- it is attractively priced with the potential to compound for several years. Below I will give a brief overview of the business and the key reasons why I think it makes for an interesting investment. As it is a new business, I don't have a detailed financial model, but will pasted below some simple segment financials to at least give a sense for the size and scope of the segments.

Overview:

Siemens Healthineers operatins in three segments:

1) Imaging Equipment - this is primarily imaging eqipment. Think xrays, CTs, MRIs, Ultrasounds, etc. the primary competitors are GE and Philips. It is primarily an oligopoly.

2) Advanced Therapies -- selling imaging equipment to labs and surgical centers that do advanced, minimally invasive procedures. It remains an open diligence question whether it is actually the equipment that Healthineers sells that is truly advanced or just the labs that just using equipment for advanced therapies. IE, the "advanced" might be a misnomer. Similar competitors to Imaging Equipment.

3) Diagnostics -- Healthineers sells testing equipment and reagents (primarily on a reagent rental basis) to hospitals and labs. The main compeitors here would be Abbott and Roche. This is a 90% recurring business do to the nature of the reagent usage / rental basis.

Healthineer's imaging equipment segment is positiong to do well for the forseeable future. They provide key equipment to radiology deparemnets which are the cornerstone of the future of medicine. Radiology departments are a key profit centers for many hospitals and also have many other key properties. 1) they are critical in the chain of care - quickly assessing patients can mean greatly shortening a patient's stay at a hospital which can reduce hospital and total system costs enomorously. 2) Advances in imaging are enabling advanced, minimarly invasive therapies that can enable both better patient outcomes, lower costs, and shorter hopsital stays. In the world of value-based outcomes/metrics -- this is good for hospitals, the medical system, patients, Healthineers, everyone. Even though the US and Europe are largely mature medical markets, radiology is growing mid single digits, and emergering markets are growing faster due to the points just mentioned. 

There are are smaller players besides Healthineers, GE, and Philips, but overtime, the big three have been consolidating. I would't expect a massive margin opportunity here -- but there is underlying market growth and it is a fundamentally pretty good business. The same holds true for Advanced Therapies.

The big opportunities for margin expansion is in the Diagnostics segment. This segment historically was sub scale adn was put together from the cobbling together from the technology combined from several historical acquistions. As a result, Siemen's system was sub part and sub-scale and much less efficient than the offering from Roche and Abbott. However, Siemens has a new testing platform called Attellica which, apparently is on part with the Roche and Abbott systems and should give Healthineers a good shot at driving meaningful improvement in their business both in terms of revenue growth and meaningful margin improvement. 

In the roadshow lunch in March 2018 management said they thought they could get margins from 14% to 19% -- and overtime they should be able to do much better.

These diagnostics businesses, when run well, can be great businesses. They are highly renewable and generate a ton of free cash flow. It remains to be seen if the Attellica platform will be a success - but it is unlikely to be worse than the existing paltform.

Valuation:

On a trailing basis, Healthineers came out at around 20x on a PE basis and has a pretty good balance sheet. Based on the postive underlying tailwinds of the imaging / radiology business and the potential upside in the diagnostics business, the should be able to grow earnings at high single digits, low double for several years. The industry is basically an oligopoly -- and given that it has spun from a much larger organization -- there is likely the chance for greater cost cuts.

as mentioned before, while not screamingly cheap, I think this provides the chance to compound attractively and if things go very well with Diagnostics you could do very well. Some historical figures are pasted below to get a sense for the business. Apologies for the formatting but it doesn't paste well.

Catalyst

Attellica system getting margins in Diagnostic segment 14% --> 19%