Tuesday, September 4, 2007

Fisher & Paykel: A Tale of two Companies

http://upload.wikimedia.org/wikipedia/en/thumb/5/55/Fisher_&_Paykel_Appliances_logo.svg/300px-Fisher_&_Paykel_Appliances_logo.svg.png


The two Fisher stocks, Fisher and Paykel Healthcare[FPH] and Fisher and Paykel Appliances[FPA] are interesting propositions when looking to top up the portfolio with a potential good long-term growth company.

These two stocks used to be parts of one company and lately the share prices of the seperate companies have been trading at a similar level.

The long-term growth story and prospects for FPA and FPH could not be more different though.

Fisher and Paykel Appliances, the small white ware producer is struggling at present.

While FPA has done well in the past and continues to grow revenue, its profit margins continue to slip as competitors have produced cheaper product with more advanced technology, previously the sole domain of FPA. Their best days appear to be behind them.

The company has responded to cheaper and more savvy foreign product by cutting production in New Zealand, their home base and moving to cheaper cost bases in Thailand.

In my opinion, this will be the only way they can continue to compete with global giants such as LG and clearly this is a case of ever diminishing returns with a finite term for cost savings. FPA simply cannot compete successfully long-term with their much bigger global competition.

Management at FPA seem to be a little confused about what direction they are heading in though. They want to compete by producing more white ware units but say they want to be a niche player with higher margins. They cannot compete as a high volume producer because they are simply too small and even as a niche player they struggle against competitors flashier product.

I have a more positive spin with regard to Fisher and Paykel Healthcare though.

The only black spot that I see on the horizon for FPH and something that it shares with FPA, is the high New Zealand Dollar but that is going to be a temporary thing as the status quo for our currency is usually for it to be weak and there is no reason why that wont be the case again given the sad state of our economy.

FPH is a company on a continued drive, in its niche market as a health equipment products producer, to expand the company through innovation, technological advantage and being at the cutting edge of its business by investing in research and development to keep its very high margins.

The margin story for this business is one of the most exciting parts, apart from the technological breakthroughs they have made for the likes of sleep apnoea and various breathing apparatus.

Most companies would kill for the margins that FPH provide for their shareholders and this puts them in good stead as they move forward and continue to innovate with new products and therefore hopefully similar high margins.

The biggest breakthroughs and innovations seem to be coming from the new sleep apnoea products range. In the year to March 2007, FPH's revenue from sleep apnoea products rose 27 per cent to $162.1 million.

At last month's annual meeting, CEO Mike Daniell estimated that F&P had around 7 per cent of the global market for such products, which is growing at about 15 per cent a year.

These products will help FPH to compete with its competitors Respironics and ResMed , its two main rivals, which both sell these products.

This kind of innovation is part of the culture of the company and it will clearly continue to be a driver of profit growth as the company gets bigger.

The two Fisher stocks were split for a reason. Management knew this at the time of the split and the tales of both companies since tell the story that management probably knew as they were taking the knife to the combined company.

"Mr Market" moves in mysterious ways and I'm still a little curious as to why he has valued these two companies with a similar share price because their future prospects couldn't be more different.


*Disclosure: I own Fisher and Paykel Healthcare



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