Morningstar | Zeiss' 2Q Results Meet Expectations, but Valuation Remains Difficult to Justify
Narrow-moat Carl Zeiss Meditec reported second-quarter results that fell in line with our expectations, and the firm remains on track to meet our forecast for the full year. We intend to keep our projections in place but will likely raise our fair value estimate by a mid-single-digit percentage to account for the cash flows received since our last update. However, the stock continues to look ever more expensive, with shares now trading near 50 times our estimate of 2019 earnings. With normalized earnings growth of about 10% annually over our five-year forecast horizon, we struggle to justify today's valuation.Now midway through the firm's fiscal 2019, Carl Zeiss has grown total revenue at roughly 6.8% in constant currency. Management provided guidance suggesting the company will end the year with revenue between EUR 1.35 billion and EUR 1.42 billion, with an EBIT margin of 15% to 17.5%. These metrics bracket our expectations for revenue of EUR 1.41 billion and an EBIT margin of 16.4% for the year. We think the updated margin outlook is the most notable, up from management's longstanding guidance that called for a margin level of 14%-16% over the medium term. We wouldn't be surprised to see this longer-term outlook ultimately rise higher, as our model calls for 50 basis points of annual margin expansion on average over the coming five years.
From a segment perspective, ophthalmic devices continues to outperform, with revenue up 7.4% in constant currency through the first six months of the fiscal year compared with 5.2% for microsurgery. The latter has been lapping a strong product launch during 2018, and our model calls for growth in the mid- to high single digits over the long run. Management discussed a handful of newly introduced products, including a microscope for ophthalmic surgery, which we believe will help support our expectation for high-single-digit growth out of the firm's ophthalmic devices segment over the next five years.
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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