Morningstar | No Surprises From No-Moat Lonza in 1Q Qualitative Update
We don't foresee any changes to our forecast for Lonza following the firm's qualitative update for the first quarter, and we're maintaining our CHF 210 fair value estimate and no-moat rating. After the recently completed sale of the water-care business, Lonza has split its previous consumer health segment and reorganized its business into two segments: Lonza pharma, biotech, and nutrition, or LPBN, and Lonza specialty ingredients, or LSI. Marc Funk, the new CEO following Richard Ridinger's retirement earlier this year, provided a qualitative overview of the business, which was largely a continuation of trends from 2018, with the pharma and biotech segment continuing to outperform while the specialty ingredients segment continues to face headwinds from softening demand and competitive pressure. The company affirmed its guidance for the year of mid- to high-single-digit top-line growth, so we don't plan to change our forecast of 8% growth for 2019. We expect 2019 EBITDA margin to be similar to the previous year, in line with guidance.LPBN now includes services in consumer health and nutrition, which produces consumer goods such as infant formula, food colorants, and sports nutrition ingredients. LPBN also offers contract manufacturing services, producing small molecules, biologics, and cell and gene technologies. LSI encompasses a broad portfolio of ingredients and coatings used in industrial applications, personal hygiene products, agricultural markets, and others. We do not believe either of these segments significantly contributes to an economic moat, given the bargaining power of Lonza's customers and the lack of differentiation in contract manufacturing. However, we expect LPBN to continue driving top-line growth, benefiting from strong innovation in the biopharma space, including with biologics and gene therapy.
Lonza supplies services and products that range from active pharmaceutical ingredients and stem-cell therapies to drinking water sanitizers, from vitamin B compounds and organic personal care ingredients to agricultural products, and from industrial preservatives to microbial control solutions. Co. operates in two segments: Lonza Pharma & Biotech, which clusters all of Co.'s offerings for pharmaceutical markets, focuses on providing custom development, custom manufacturing, cell therapy, viral therapeutics and bioscience solutions; and Lonza Specialty Ingredients, which includes offerings in its consumer care, agro ingredients, industrial solutions, wood protection and water treatment.
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