Morningstar | Carl Zeiss' Strong Performance Doesn't Support Current Valuation
Carl Zeiss Meditec AG is one of the largest entities within the Carl Zeiss family and the only public subsidiary after its listing on the German stock exchange in 2002. The firm has long established itself as a leading manufacturer of high-end optical equipment, creating dominant market positions in ophthalmology and microsurgery globally. Management’s strategy has emphasized internal research and development and matching or outspending rivals on a percentage of revenue basis, which has led to efficient and consistent product development. This view forms the basis for our narrow moat rating, as we believe the firm has established valuable intangible assets and customer switching costs that protect its entrenched position.The firm is amid meaningful product cycles in both business segments, which we believe will accelerate growth and improve returns on capital over the coming years. In ophthalmology, the firm’s novel small-incision lenticule extraction procedure, or SMILE, marks the company’s attempt to revitalize the refractive laser surgery market with the first meaningful innovation since bladeless LASIK was introduced in 2001. In microsurgery, the firm’s leading share in neurosurgical microscopes will be enhanced by the launch of the Kinevo 900 robotic visualization platform, the first new product launch in this segment since 2011.In conjunction with internal development initiatives, Zeiss has enhanced its product portfolio via select acquisitions over time. Management raised EUR 315 million through a secondary equity offering in the spring of 2017, which we believe signals an increased appetite for acquisitions in the near term. We wouldn’t be surprised to see a transformative deal that provides the company a strategic foothold in the U.S. surgical ophthalmology market, which we believe is high on management’s priority list. However, we also acknowledge management’s prior use of special dividends to return excess cash to shareholders, and would anticipate this avenue to be used if acquisition negotiations fail to bear fruit.Carl Zeiss Meditec is a holding company. Co.'s businesses are focused on two primary areas: Ophthalmology and Microsurgery. In Ophthalmology, Co.'s operations are divided in to two strategic business units: Ophthalmic Systems, which includes a range of laser and diagnostic systems for ophthalmology; and Surgical Ophthalmology, which consists of activities in the field of ophthalmic implants and consumables. In Microsurgery, Co. provides surgical microscopes and visualization solutions, e. g. for ear, nose and throat surgery, or neurosurgery. These products are mainly used to assist with the removal of tumors, as well as the treatment of vascular diseases and functional disorders.
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