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Morningstar | Fiscal 2018 Results Signal Continued Strength From Zeiss' Product Portfolio

Narrow-moat Carl Zeiss Meditec reported strong fiscal fourth-quarter and full-year results that largely tracked our expectations. As we update and roll our model, we'll likely raise our fair value estimate by a mid-single-digit percentage, largely attributable to the time value of money. While we're positive on the company's competitive positioning and longer-term fundamental outlook, current valuation levels continue to embed forecasts that we're not comfortable making in our base-case scenario. Prospective investors should await a more attractive entry point, in our view.

While the firm's microsurgery segment did a bit better than our forecast for the year, and the ophthalmic devices segment a bit worse, consolidated revenue growth and operating profitability came in more-or-less consistent with our view. The microsurgery business continues to benefit from a strong product cycle that we believe will remain a tailwind in 2019. The ophthalmology business grew a little short of our expectations, likely due to slower adoption of its next-generation refractive laser procedure. Encouragingly, in October the company received FDA approval to treat astigmatism patients with this procedure, which should help reduce barriers to broader physician adoption. All said, the firm's 11.1% constant currency revenue growth for the full year suggests its newly launched products continue to gain share across markets and geographies. However, we think the business is more likely to grow at a mid- to high-single-digit rate in a midcycle environment.

On the margin front, Zeiss has performed in line with our relatively optimistic outlook. Adjusted EBIT margin expanded 100 basis points year over year to 15.7%--near the high end of management's maintained 14%-16% long-term range. This was achieved with 100 basis points of currency headwind during the year, which gives us comfort in our five-year projections that incorporate 50 basis points of margin expansion, on average, each year.