Spruce Point Capital Management Releases A Strong Sell Research Opinion On Hill-Rom Holdings, Inc. (NYSE: HRC)

NEW YORK, Oct. 29, 2019 /PRNewswire/ -- Report entitled "Over The Hill" outlines how Hill-Rom Holdings, Inc. faces 25-55% downside risk to approximately $45 to $75 per share. The full contents of the report can be reviewed at www.sprucepointcap.com. Spruce Point believes that Hill-Rom ("HRC") is a low-quality medical equipment roll-up whose recent "core" financial performance has been underpinned by accounting machinations and temporary business segment pruning. We believe HRC is now rapidly approaching the end of its current growth cycle as it faces slowing growth from new products, limits to M&A, and the end of its recent divestment campaign. We believe that HRC management has few, if any, credible alternatives to sustain future growth and that it is being forced to "pitch" a new financial outlook a year ahead of schedule.

    --  Non-Stop M&A And Confusing Math Masks A Slow-Growing Business:  In an
        attempt to make up for slow top-line growth driven by low demand for
        low-tech hospital furniture, management has spent ~$3.5B on M&A since
        FY09 on businesses across numerous sub-sectors and geographies. However,
        it has subsequently exited or divested of many of these businesses,
        usually at a loss after experiencing material top-line contraction. 
        While the sell side has cheered such activity, Spruce Point sees them as
        evidence of management treading water as it burns cash to acquire
        businesses which it subsequently drives into the ground, and which, in
        our view, require further goodwill impairments. As management exits
        failing acquisitions, it instructs analysts to evaluate growth using its
        proprietary "core growth" metric, which adjusts growth for the negative
        impact of planned divestitures even before they occur. Management
        conveniently "re-bases" core growth every few quarters by adding new
        slow-growth business lines to non-core revenue, supporting consistent
        mid-single-digit core growth even as these ring-fenced verticals drag on
        total sales. Management has been able to present top-line growth of
        almost 300 bps greater than total growth in some quarters by selectively
        adjusting the many puts and takes which make up "core growth."


    --  Slowing Revenue Growth From New Products Likely To Expose True
        Underlying Growth:  New product releases such as its Centrella "smart"
        bed have prevented Hill-Rom from showing dramatic core sales contraction
        over the last two years: these new products have grown from generating
        zero revenue prior to 2017 to over $400M in FY19 (expected). Management
        claims that it has accelerated the hospital bed repurchasing cycle by
        transforming the bed from a mere piece of furniture into a vital piece
        of hospital room technology. However, former employees and industry
        experts suggest that new product revenue will quickly normalize after a
        brief initial period of sales uptake. After adjusting for M&A and
        incremental sales contributed by new products, Spruce Point believes
        that Hill-Rom's underlying sales growth has been effectively flat at
        best, versus management's reported "core growth" of 2%-6% through the
        past two years.

    --  Time To Reset Expectations: As the recent plateau in sequential growth
        from new products is set to become visible in annual growth starting
        this quarter, we believe that Hill-Rom may be set up to post
        disappointing growth in Q4 and in subsequent years as Company growth
        reverts closer to its ex-new product sales growth rate of ~0%. Almost
        all EBITDA margin expansion since FY16 can be attributed to divestitures
        of lower-margin business and acquisitions of higher-margin businesses.
        Price increases, endless restructuring, and supposed post-acquisition
        synergies appear to have had almost no positive impact on profitability.
        The sell side continues to see room for close to 250 bps of margin
        expansion through FY21, but, with divestitures set to cease next year
        and with limited capacity for further M&A, Hill-Rom will likely achieve
        less than half the sell-side's expected level of margin expansion.


    --  Fleeing Executives And Insider Sales Are Indicative Of An Unattractive
        Risk/Reward:  Over the past two years, HRC has lost its CEO, CFO, CIO,
        and two of its three division heads. It is currently on its fifth CFO
        since 2010. Executives frequently leave after having spent just one or
        two years (or fewer) at the Company, sometimes with little forewarning
        and to the surprise of peers, per our research.  When accompanied by
        significant insider net selling, we find this level of executive
        turnover concerning given that those most knowledgeable about the
        business and its plans are choosing to leave the Company rather than see
        the recent shift in strategy to completion. Spruce Point believes that
        the Street overestimates Hill-Rom's forward sales growth due to its
        focus on the "core growth" metric and its lack of appreciation for
        slowing new product sales. We believe that investors will be
        disappointed by slower-than-expected sales growth and stagnating margins
        as the recent round of divestments is set to end. We also believe that
        investors should not give management credit for earnings growth achieved
        through dubious adjustments and reserve reductions, which have boosted
        earnings materially through the past four years. Spruce Point sees
        25-55% downside in HRC shares when each of these factors is taken into
        account.

Spruce Point Capital has a short position in Hill-Rom Holdings, Inc. (HRC) and stands to benefit if its share price falls.

About Spruce Point Capital
Spruce Point Capital Management, LLC, is a forensic fundamentally-oriented investment manager that focuses on short-selling, value and special situation investment opportunities.

Contact
Sean Donohue
Spruce Point Capital Management
sean.donohue@sprucepointcap.com
212-519-9813

Spruce Point Capital Management, LLC is a member of the Financial Industry Regulatory Authority, CRD number 288248.

View original content:http://www.prnewswire.com/news-releases/spruce-point-capital-management-releases-a-strong-sell-research-opinion-on-hill-rom-holdings-inc-nyse-hrc-300947241.html

SOURCE Spruce Point Capital Management, LLC