Carl Zeiss: Raising FVE 18% After Assigning a More Favorable Outlook and Reviewing Balance Sheet

After reviewing our key valuation assumptions, we are raising our fair value estimate for Carl Zeiss Meditec AFX to EUR 90 per share from EUR 76, driven by our updated outlook for the company’s long-term potential and a higher level of appreciation for its cash balance. Zeiss is one of the largest medical technology companies in the world and operates in two segments: ophthalmic devices and microsurgery.

OPT makes up roughly 75% of Zeiss’s total sales and key markets in the segment include ophthalmic diagnostics and surgical ophthalmology. We expect the segment to grow by midsingle digits over the next five years driven by an aging population, an increasing prevalence of myopia, and a growing access of healthcare in emerging markets. The company has seen a significant gross margin expansion over the last five years driven by an increase in case-dependent sales, such as intraocular lenses and surgical instruments, due to their higher margins compared with equipment, and we expect this trend to continue in the future.

MCS is composed of implants, surgical instruments, and surgical visualization systems, and Zeiss controls a lion share of the market. The company’s long-term strategy relies on high research and development spending in pursuit of product innovation. Zeiss’ continued innovation should help drive top-line growth for the company as newer features encourage scope upgrades. Higher pricing can also be a tailwind for margin.

Near-term challenges include converting a high level of backlog into sales at an efficient manner and curbing impacts from supply chain challenges, foreign exchange, and procedure softness in China. China (25% of total sales) is Zeiss’s largest market and a persistent uncertainty in its COVID-19-related policies raises potential concerns. Also, inflationary pressures continue to hike payroll and procurement costs, putting pressure on margins.