Shares of a German Ventilator Manufacturer Are Soaring

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While major German indexes have lost between 17% and 28% in 2020, shares of Draegerwerk AG & Co KGaA (D:DRWGg) have gained about 70%, taking off in mid-March after Germany ordered 10,000 ventilators and other medical equipment from the company. M.M. Warburg analyst Eggert Kuls estimates that each ventilator costs about 20,000 euros, making the deal worth 200 million euros ($221 million) in revenue for Draeger.

“The ventilator super cycle could yield more upside,” for Draeger, Hauck & Aufhaeuser analyst Aliaksandr Halitsa wrote in a note last week, upgrading the stock to hold from sell. Halitsa estimates that the new ventilator demand will add 230 million euros to Draeger’s 2020 sales and will help boost earnings before interest and tax for the group to 173 million euros. The company reported 2.78 billion euros in revenue last year and 66.6 million euros in Ebit.

The problem, however, is that production capacity for ventilators is limited, and so are supplies needed to make them, so churning out more of the much-needed machines is not straightforward. Draeger has added a second shift producing ventilators and may switch to three shifts producing 24 hours a day for this specific product line, spokesman Peter Mueller said. The company will hire more staff and may relocate workers from other areas to assemble the machines.

Still, medical products need testing before being shipped to hospitals, and another bottleneck the company is facing is with the equipment needed for the 24-hour tests the finished devices have to undergo, Mueller said. Some electronic parts also come from Asia, where supply chains were disrupted, he said.

Draeger does not disclose how much revenue it makes from ventilators or how many units it sells per year. It generated 1.74 billion euros in revenue, or 63% of its total, from medical devices last year, which includes other major product groups, such as incubators and anesthesia devices. Draeger also makes personal protection equipment for hospital staff, including medical masks.

While the pandemic creates an “exceptional boom” for ventilators, the share-price gain may have gone too far, according to Bankhaus Metzler analyst Alexander Neuberger, as Draeger will struggle to fully convert the market potential into sales. Even after expanding capacities, Draeger will generate no more than a mid single-digit percentage of its revenue from ventilators, he said.

For now, the shares’ performance has surpassed all analysts’ expectations: of the four analysts that issued or repeated price targets on the stock this month, the average is 61.25 euros, or 33% below where it is currently trading.

“Production capacity is the limiting factor,” Metzler’s Neuberger said in an interview. “The large order from the German government alone fully uses the existing capacities for two years.”

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