Analyst Downgrades Halyard Health To Underweight, Sees Pressures As 'Formidable'

• Halyard Health Inc HYH shares have declined 27 percent since July 13, after hovering above the $40 mark for several months.
• Morgan Stanley’s David R Lewis downgraded the rating on the company from Equal-weight to Underweight, while reducing the price target from $38 to $27.
• The company’s below peer growth and underappreciated structural issues remain concern areas, Lewis mentioned.

Analyst David R Lewis said that the upcoming group purchasing organization [GPO] “magnify our structural concerns around two-thirds of Halyard’s business.” He added that investors do not seem to be considering that the market has changed in the company’s Surgical & Infection Prevention [S&IP] businesses, which contributes two-thirds of total company sales.

“Halyard has historically seen 1% pricing pressure in this business but we now see 2-3% pricing pressure as more likely with risks to the downside. 100 bps of incremental pricing pressure for S&IP is worth $10mn to the top-line and ~$0.12 (6%) to the bottom line,” Lewis added.

Terming the consensus estimates for 2016 as “potentially 10% too high,” Lewis stated that the company is unlikely to record margin expansion and EPS growth next year.

The Morgan Stanley report noted that the Street is missing several dynamics - price and share pressures in S&IP are not temporary but structural, material margin improvement will take longer and the acceleration in Medical Device is not adequate to offset the pressures in S&IP.

Although Halyard's underperformance and seemingly low multiple may seem intriguing to value-based investors, it does not reflect structural lower growth, Lewis said, while adding Halyard Health’s stock is not “cheap” despite the 40 percent decline from its $50 high in early-April.