EUR 850.00 For Business Accounts Only

Morningstar | Lonza Raises Guidance on Sales Growth and Margin Improvement; Maintaining FVE

Lonza posted solid top-line growth in the first half, with 8.2% organic growth compared with last year's first half, leading the firm to bump full-year revenue guidance from mid-single-digit growth to mid- to high-single-digit growth. As we were already at the higher end of previous guidance, we do not expect a material change to our fair value estimate. The firm also added return on invested capital as a reported performance metric, with guidance of double-digit ROIC by the end of 2022. This falls in line with our expectations, as we estimate over 12% return on invested capital in 2022. However, we continue to believe that the firm is susceptible to risk from decreased demand in an economic downturn as well as risk from the strong bargaining power of its large pharmaceutical customer base, which precludes awarding Lonza an economic moat.

Lonza's revenue growth in the first half was driven by strength in its pharma and biotech segment, which contributed about half of Lonza's total sales and posted 14.7% organic growth, benefiting from strong demand in small-molecule and biologic manufacturing. We were pleased to see that the firm's investments in cell and gene therapy continue to develop, with increased capacity from the new Houston facility, which opened in April 2018. Both top-line and bottom-line growth were softened by weakness in the wood and crop protection and water-care businesses. Management attributed the deteriorated margins to raw material pricing and weather-related delays, but we think this points to the lack of competitive edge in these industries. However, we believe that these slower-growing, lower-margin segments provide key diversification for the firm, offsetting some of the risk in its pharma and biotech segment.