F&P Healthcare gets new chief

Fisher & Paykel Healthcare has appointed Lewis Gradon as its next chief executive following the retirement of Michael Daniell in April. Daniell has been with F&P Healthcare for 37 years and, as chairman Tony Carter put it, 'has led a team that has taken the company from a small medical division of an iconic New Zealand appliance manufacturer to the global leader in respiratory humidification, with a market capitalisation of more than NZ$5 billion, more than 3,500 employees and over NZ$730 million in assets'.

Lewis Gradon has a technology background, having previously been F&P Healthcare's Senior Vice President of Products and Technology, a position he has held for 15 years. Prior to this he was General Manager of Research and Development.

Gradon's position is being filled by another internal promotion – Dr Andrew Somervell, previously General Manager of Product Groups, where he oversaw the development of the company's obstructive sleep apnea products and managed research and development. He has worked at the company for 10 years.

For stable and successful companies, we generally prefer internal promotions to top jobs. Internal candidates understand the company and its culture and usually require less time to find their footing, and the positives and negatives of internal candidates are better known by watching their performance over a long period. It also benefits culture to give staff the opportunity to move up through the ranks; the potential for promotion is a strong motivator.

Downgrade

Management expects revenue to increase 19% to NZ$800m in 2016, and net profit to come in at NZ$135m–140m, an increase of 22% at the midpoint.

The company is arguably in a better position now than at any point in its history, but this hasn't gone unnoticed. The share price has risen 16% since we reported on the company's interim result on 27 Nov 15 (Hold – $7.63).

F&P Healthcare is a well managed, high-quality company that we would love to own at the right price. But with the stock now trading on a forward price-earnings ratio of 39 and free cash flow yield of just 3%, the right price is well below its current level – especially considering its larger competitor, ResMed, is trading on a forward price-earnings ratio of just 21. ResMed increased research and development spending 14% in the six months to December and outspends F&P Healthcare two-to-one; it's a formidable competitor and it wouldn't take much more than than a few well received new product releases for it to regain market share lost to F&P Healthcare. 

We estimate that management's earnings guidance may be around 10% lower than underlying earnings due to currency hedging, but even taking this into account the underlying PER is still upwards of 35. We won't push our luck. There are better opportunities on our Buy list and we're downgrading to SELL.