EUR 850.00 For Business Accounts Only

Morningstar | First-Quarter Update Puts Zeiss On Track to Meet Our Forecast, But Valuation Remains Stretched

Carl Zeiss Meditec's first-quarter performance update largely fell in line with our expectations for the full year, with consolidated revenue growth of 9% on a constant currency basis. We'll likely keep our forecasts in place for the narrow-moat firm and intend to maintain our EUR 48 fair value estimate. Our valuation implies roughly 26 times and 14 times our adjusted earnings and EBITDA estimates for the company's fiscal 2019, and shares continue to look prohibitively expensive at a market valuation that implies 43 times and 25 times our respective forecasts.

Zeiss continues to perform well on the back of multiple ongoing product launches, although we expect growth rates to moderate as the company laps the early years of initial adoption. The ophthalmic devices segment was the standout this quarter expanding 9.8% in constant currency, helped by strength in both refractive and cataract surgery. Microsurgery, on the other hand, grew 6.7% in constant currency down from 16.5% in fiscal 2018. The firm has benefited thus far from penetration into early-adopter accounts since the launch of its next-generation microscope, and while the upgrade cycle has a relatively long tail, we think this quarter is more representative of growth over the medium term. We expect this segment to expand 9% for the full year.

Firmwide profitability is also trending in the right direction, with adjusted EBIT margin up roughly 160 basis points year over year. While a good portion of this was due to the transitory effect of higher-than-average research and development expense capitalization associated with late-stage projects, the remaining 40 basis points is consistent with our expectation of 50 basis points of consolidated margin expansion annually. Management indicated that per-procedure license revenue has been a substantial contributor to its refractive surgery results, which should help drive both revenue and margin higher as its laser installed base continues to expand.

Finally, the previously announced acquisition of IanTech closed in the quarter, which appears to be roughly EUR 100 million based on current disclosure. This adds an early stage phacoemulsification product to Zeiss' cataract pipeline, but it'll likely be a few years until we see it progress toward commercialization. Management has indicated this addition will add to the firm's research and development budget for the year, but we anticipate revenue growth will keep this expense as a percentage of sales slightly lower versus last year. Following the deal, Zeiss has nearly EUR 580 million in net cash remaining on its balance sheet.