Why Halyard Health Is Rallying Higher Today

What happened

After reporting its third-quarter financials and announcing the sale of its surgical and infection prevention business to Owens & Minor (NYSE: OMI), shares in Halyard Health (NYSE: HYH) increased by more than 10% earlier today.

So what

Halyard Health is selling its S&IP business to Owens & Minor for $710 million. The deal accelerates its transition toward being solely focused on medical devices and pain management.

The move should bolster Halyard Health's profitability because the S&IP business offers lower margins than its medical device business. Once the transaction has been digested, Halyard Health should be able to get back to revenue growth because the medical device and pain business is growing more quickly than the S&IP business, too.

In the third quarter, Halyard Health's companywide net sales were $401 million, up from $398 million a year ago. Medical devices net sales were $151 million, up 4% year over year, and S&IP net sales were $246 million, down 1% year over year.

Halyard Health's operating profit was $29 million in the third quarter compared to $21 million in Q3, 2016. Its medical devices operating profit was $38 million, up 18% from last year, and its S&IP operating profit was $18 million, down 20.7% year over year. Corporate and other expenses offset some of those profits, resulting in the $29 million figure.

Now what

Jettisoning the S&IP business should allow Halyard Health shares to trade based on the opportunity associated with its financially more attractive medical device business. In the first nine months of 2017, Halyard's medical device sales have grown 8%, and its operating profit is up 28% compared to last year.

The cash influx from Owens & Minor is good news for investors, too, because it means greater financial flexibility. Halyard Health exited September with $580 million in debt, so the company could use proceeds from its sale to reduce borrowings or fuel acquisitions.

Overall, Halyard Health's performance in the coming quarters could endure some choppiness as it completes its transition, but this deal appears to position it better to grow shareholder value long-term.

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Todd Campbell has no position in any of the stocks mentioned. His clients may have positions in the companies mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.