$AFX.DE - German top player in ophthalmology and microsurgery

Carl Zeiss Meditec AG an update

I am writing a short update on Carl Zeiss Meditec AG. My first piece on $AFX.DE was on 9th of October 2023 see below:

- there was some price development I would say the least:

source: TIKR.com

I thought in October 2023 that price around 75 euro per share is a good entry point (as a matter of fact I still do) and as of today Mr. Market is quoting around 50 euro per share so I just buy.

The company has two strategic business units:

1. Ophthalmic products - Number 2 player with a market share of 11.5% / gaining market share

   

   source: 2023 annual report

2. Microsurgery products - Number 1 player with 50% market share

   

   

   source: 2023 annual report

   

   source: 2023 annual report

   So why I like the company? It is number 2 and number 1 in its segment markets. It is very important to be a top 1 or 2 player in a particular segment. That means you can use scale to reduce costs and fuel growth making it hard for smaller competitors to keep up on price.

3. The company is selling medical equipment so staying on top of the R&D game is important. Being sharp here is what can provide durability, profitability and growth. The company is consistently spending 12-16% of revenue in R&D - it is a real investment going straight out from the P&L.

source: own calculations / using data from TIKR.com

If we adjust for R&D - book it as investment and depreciate it for 5 years in order to get more realistic economic margins, current treatment of R&D as an expense is understating the true profitability of the business.

source: own calculations / using data from TIKR.com

source: own calculations

So why I like the company? The consistent R&D spend is ensuring the long-term dominance of the business and is understating the operating margins. Accounting is not economics and adjustments are essential to have a clear view on the business profitability.

4. One of the things I was most excited about when reading the annual report was the KPI framework the company uses to reward management. Tell me what the KPIs and I will tell you what the management cherishes the most.

   

   source: 2023 annual report

It is really ensuring that management is focused on metrics like EVA and FCF (free cash flow).

So these are my thoughts on the company. Most recent results show that 2024 was challenging and there are not many signs for optimism in the near term but the idea of my post is to look at the company and the business from a broader strategic perspective not from a quarter by quarter angle.

Think like an owner not like a sell side analyst.

PS: The following writeup is a personal opinion and not an investment advice. Do your own due diligence.

& Thank you for reading!