1 week Ago
JHVEPhoto Dear readers/followers, I was honestly surprised when I saw the degree of underperformance in Carl Zeiss Meditec ( OTCPK:CZMWF ) ( OTCPK:CZMWY ), a small position I have been increasing step by step over the past few months and about a year of underperformance where the company has greatly normalized in valuation. This is one of the issues of investing in and even covering companies that tend to trade at a massive premium. It's also one of the reasons why the number of investments where I accept any sort of significant premium is very low.
Carl Zeiss isn't even that big a position for me - yet - though at sub-€60/share for the native ticker, I can tell you that I will be looking to potentially add more shares here. The company is now in a materially better position for investing. As always, a 30%+ decline since the last article , found here, does not faze me.
The reason for the decline is quite clear to me - and while I didn't expect the degree of drop, I was cognizant of the potential for a drop going forward because the company is currently amid an earnings decline. In this article, we'll update on Carl Zeiss Meditec, and why I remain an investor and long-term holder of this stock - and in essence, why I invest the way I do where I look for the long-term upside rather than the short term. The reason that I'm doing this revisiting of the stock is that in a relatively short time, the stock has seen a considerable degree of movement, warranting a revisitation here because the upside is now different from it was only a few months ago.
I believe, looking for long-time conservative upside, this is now something we have even more of. Let me show you what I mean. Carl Zeiss Meditec - A significant decline, but now significant upside as well.
So, the first thing I want to point out here is that the company is actually not performing all that badly. A 30%+ decline in less than 4 months might imply a catastrophic sort of development - but this is not my view. What we're talking about are a few things - a decline in revenue for 9M24, amounting to a total of 1.
5% decline , and adjusted for FX it's up 0.1%. The major thing that people seem to be getting stuck a bit on is the company's decline in earnings and margin.
This is more justifiable, given that we're talking about an EBIT decline of 30%+ and a margin decline of 5% on the EBIT level. But again, context is crucial here. As I have written in previous articles, we always expected 2024 to be sort of the kitchen sink year, the bottom year for the company.
The company has already been clear that the primary reason for this is simply market recovery - which has been stalled until about the next year. This trend is following many years of significant growth - which is why my objective is to pinpoint a good entry for the company. I thought I'd found it previously - but obviously that was not the case just yet.
Aside from 9M24 and the current market situation, Carl Zeiss remains a very strong player with a solid market share and margins - when they're not impacted by this. Carl Zeiss IR The company is also in one of the best positions in the world - in my view - when it comes to structural and demographic tailwinds. The aging population will require an increasing volume of cataract surgeries, which is what the company does, and there's an accelerating prevalence of Myopia, requiring vision corrections.
The company does crucial products and services in terms of dental, throat, ear, brain, and eye surgeries in its various fields - with both segments being appealing here. Carl Zeiss IR The major flaw, as I see it, was to expect the company to continue to outperform despite a quite volatile downturn in the market. This major downturn is, as I will be quick to point out, not just limited to this company either.
More, it's the general market and market volatility in many industrial fields - and this is, in a way, an industrial company. But the company continues, in my mind, to warrant a high premium because it works as a market leader. Carl Zeiss IR The company spends a lot on R&D.
That is the reason so little goes to the sub-2% dividend. Carl Zeiss Meditec works an R&D percentage to revenues of over 15%, which is one of the highest I've encountered for a company this size. It also ensures that it remains at the spear tip of innovation for this field.
If we're looking at risks and drawbacks, one of those is that the company now has most of its sales in APAC - and because China is part of this, this notoriously more volatile sales region should be expected to be characteristic of this company's development on both the top line and also a bit on the bottom line. This recent 9M period is a very good example of this. APAC now makes up 48% of the company's sales.
The company points to its superior product mix - including higher percentages of recurring revenue, allowing for profitable growth and less cyclicality to the results. The company continues to expand its offering, but recurring revenue rather than one-offs is what I am looking for here. And now, that is up to 43% of total revenue for 2022, compared to 9% of total about 20 years ago.
What is driving this change? That's due to the introduction of products such as surgical consumables such as IOLs (intraocular lenses), treatment packs, viscoelastic, products in cassettes, and drapes, as well as product service, which makes sense given the increased complexity of the company's products. So this is what I like to see. I don't necessarily want to see consumables focus because this can mean that customers may try to replace originals with knock-off products, but the company's focus on service is excellent.
With regard to IOLs, the market is clearly growing here. Carl Zeiss Meditec IR (Carl Zeiss Meditec IR) One of the reasons I even started looking at the company was, in fact, that I have glasses and Myopia - so I wanted to look at the companies that are active in this market. Carl Zeiss Meditec is without a doubt the leader here, and peers do not even come close.
Carl Zeiss IR While the company results were not good as such for the latest few months, and even for 9M24, and aren't, in fact, likely to be good for the near term either, that is something that, I believe, has been clear for some time - which is why it does not bother me all that much. I have checked and re-checked my calculations on this one, and forecasting accurately here is very difficult due to the market volatility. I have to focus more on that the recovery will come, and that at that point, the company will be a market leader in recovery - and what sort of valuation we can expect for a market leader in recovery.
Here is what I believe with regard to this. Carl Zeiss Meditec Valuation - The upside is now clearly 15% annualized, even with lower P/E multiples As the heading suggests, even if we go down below 25x P/E for this company, which is well, well below its averages, we find ourselves at over 15% annualized here. The yield may not be fantastic, but the thesis I espouse here is one based on two things.
One is that Carl Zeiss is a market leader, unlikely to stop being a market leader due to this one-year dip. Two, that a market leader with a one-year dip, will recover to a valuation resembling the former valuation it held prior to this. If those assumptions turn out to be true, the logical conclusion is that Carl Zeiss has only one direction to go from here going forward - up.
The company currently trades at a normalized P/E of 29x, but this is severely impacted by the current results. Looking at something like the 2023 or 2022 results, the company's P/E would be closer to 16-18x. This shows you how deep the valuation has gone here due to the earnings decline, which is currently expected to amount to at least 41.
5% - but then recover by about the same amount during market recovery in the year 2025E (Source: FAST Graphs Paywalled Link ) This is the scenario I'm "betting on", here, and even if the recovery takes longer, it doesn't really faze me. I'm more interested in whether I've invested in a good company, and whether the company has any real issues going forward. The answer to those two is yes and no, respectively.
The 20-year normalized P/E for this company is 30x P/E. That means that this is one of the very few companies where I say that 30x P/E or anything above that could be considered valid. A 30x P/E forward consideration here results in an annualized upside, based on current forecasts, of 30% annualized to 2026E, or a total RoR of 72.
52%. That is why I am positive here - not so much for what happens in 2024. And that is the base case.
The 10-year average for Carl Zeiss Meditec during a growth period is 40x P/E. While I do not consider it valid for the long term, I would not sell the company below 35-40x P/E, and this implies a longer-term upside of 48%, and a total 3-year RoR in the triple digits, well over 110%. When a company moves in this fashion and dips - it's always hard to see the eventual upside.
But if there's support for this, and if we can consider it likely, that's when there's a reason to "go for it". It's all about if the company you're investing in is, in fact, worth what the market is saying, or if it's worth more or less. In this case, I firmly believe the company is worth more.
In my last article, I gave the business a PT of €130/share for the long term. The relevant ADR here is, I would say, CZMWF. This is a decently liquid ADR, and a 1:1 Share ADR, which means that my share price PT for the ADR is around $144/share.
You might expect me to cut it here, but I won't - I still believe the company's upside to be this high in the case of normalization. That is why I continue to add, and why my thesis for Carl Zeiss Meditec is as follows. Thesis Remember, I'm all about: 1.
Buying undervalued - even if that undervaluation is slight, and not mind-numbingly massive - companies at a discount, allowing them to normalize over time and harvesting capital gains and dividends in the meantime. 2. If the company goes well beyond normalization and goes into overvaluation, I harvest gains and rotate my position into other undervalued stocks, repeating #1.
3. If the company doesn't go into overvaluation, but hovers within a fair value, or goes back down to undervaluation, I buy more as time allows. 4.
I reinvest proceeds from dividends, savings from work, or other cash inflows as specified in #1. Here are my criteria and how the company fulfills them ( italicized ). It's even possible for me here to call the company actually "Cheap" - and that is rare for this business.
This means that Carl Zeiss Meditec now fulfills 5 out of 5, I'm adding here and saying "Buy". Editor's Note: This article discusses one or more securities that do not trade on a major U.S.
exchange. Please be aware of the risks associated with these stocks. The company discussed in this article is only one potential investment in the sector.
Members of iREIT on Alpha get access to investment ideas with upsides that I view as significantly higher/better than this one. Consider subscribing and learning more here. Wolf Report is a senior analyst and private portfolio manager with over 10 years of generating value ideas in European and North American markets.
He is a contributing author and analyst for the investing group iREIT®+HOYA Capital and Wide Moat Research LLC where in addition to the U.S. market, he covers the markets of Scandinavia, Germany, France, UK, Italy, Spain, Portugal and Eastern Europe in search of reasonably valued stock ideas.
Learn more Analyst’s Disclosure: I/we have a beneficial long position in the shares of CZMWF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha).
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