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Stocks of a German Ventilator Producer Are Hovering

(Bloomberg) — A crushing global shortage of ventilators needed to treat coronavirus patients has sent a German smallcap stock soaring, leaving analysts scrambling to value both the shares and the company’s ability to help combat the crisis.

While major German indexes have lost between 17% and 30% in 2020, shares of Draegerwerk AG & Co KGaA have gained about 75%, 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.

That’s all very well, but Draeger has limited capacity to produce ventilators and a limited supply of components, 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, with the 24-hour tests required for the finished devices creating another bottleneck, Mueller said. What’s more, some electronic parts also come from Asia, where supply chains were disrupted.

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The first batch of the 10,000 ventilators ordered by the German government are ready, Draeger CEO Stefan Draeger said in a Spiegel interview published on Friday, without specifying the number of machines. He urged the German government to clarify how the machines will be allocated and to ensure the hospitals treating patients with acute lung failure will be served first. The shares rose about 5% on Monday while broader German markets fell.

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.

The company expects to ship at least 10,000 ventilators to other countries this year as well, according to Mueller, meaning production capacity will rise to more than 20,000 units. Global capacity for the type of machines suitable for intensive care is about five times that, the company estimates, with Sweden’s Getinge AB and Switzerland’s Hamilton Medical AG among other major players. With U.S. President Donald Trump saying the U.S. alone wants to make or acquire 100,000 units, companies including carmakers are now also working on producing the machines.

While the pandemic creates an “exceptional boom” for ventilators, Draeger’s share-price gain may have gone too far, according to Bankhaus Metzler analyst Alexander Neuberger, as the company 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 38% below where it is currently trading.

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

(Adds Spiegel interview in sixth paragraph, more information from company in eighth.)

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