ICU Medical Earnings: Operational Problems Continue To Pressure Near-Term Outlook
No-moat ICU Medical ICUI turned in a mixed second quarter with weaker-than-expected sales but strong profits. Negatively for 2023, management suggested that sales would be weaker than previously expected in a couple businesses and narrowed its guidance range for profits mildly below our previous expectations. However, making a slight cut to our 2023 view does not materially change our $177 fair value estimate, and we continue to view ICU shares as about fairly valued.
During the quarter, ICU turned in weak sales but strong profits. Sales declined 2% year over year (down 1% in constant currency) including weakness in its vascular access and IV solutions businesses. Generally, those products should grow along with medical utilization, which has been rebounding in recent months, so that performance was disappointing. Also, management noted that most of the weakness stemmed from the legacy Smiths operations, including vascular access products that look likely to significantly underperform previous expectations through the rest of the year, and included some headwinds affecting IV solutions that ICU still sources from Pfizer, including from a facility that was recently hit by a tornado. Positively though, as supply chain issues eased year over year, gross margin rose to 35% in the quarter, up 500 basis points from the prior year period, as ICU continues to improve its operating efficiency. Including other cost controls in the quarter, ICU increased its adjusted EPS 37% to $1.88, or well above FactSet consensus of $1.60.
Considering those impressive profit trends, we were disappointed that management narrowed its guidance range for 2023, pushing down the top end of that new range below our previous expectations on continued expected weakness in those vascular access and IV solutions operations. However, making moderate changes to our near-term assumptions does not materially affect our fair value estimate, which depends on much longer-term assumptions.
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