Carl Zeiss Meditec AG - $AFX.DE

From a manufacturer of technologically excellent special products to an innovative and customer-oriented solution provider

Carl Zeiss AG branded as ZEISS, is a German manufacturer of optical systems and optoelectronics, founded in Jena, Germany in 1846 by optician Carl Zeiss. Together with Ernst Abbe (joined 1866) and Otto Schott (joined 1884) he laid the foundation for today's multi-national company. The current company emerged from a reunification of Carl Zeiss companies in East and West Germany with a consolidation phase in the 1990s. ZEISS is active in four business segments with approximately equal revenue (Industrial Quality and Research, Medical Technology, Consumer Markets and Semiconductor Manufacturing Technology) in almost 50 countries, has 30 production sites and around 25 development sites worldwide.

Carl Zeiss AG is the holding of all subsidiaries within Zeiss Group, of which Carl Zeiss Meditec AG is the only one that is traded at the stock market. Carl Zeiss AG is owned by the foundation Carl-Zeiss-Stiftung. The Zeiss Group has its headquarters in southern Germany, in the small town of Oberkochen, with its second largest, and founding site, being Jena in eastern Germany. Also controlled by the Carl-Zeiss-Stiftung is the glass manufacturer Schott AG, located in Mainz and Jena. Carl Zeiss is one of the oldest existing optics manufacturers in the world.

In 2002, Carl Zeiss Meditec AG was created through the merger of the ZEISS ophthalmology division with Asclepion-Meditec AG, a specialist in medical lasers. What was already a long-established division at ZEISS and a young start-up gave rise to what is now a world-leading provider of ophthalmology and microsurgery: Carl Zeiss Meditec AG.

Motto: Seeing Beyond

The portfolio of the company is pretty broad:

I am not a doctor but I can definitely see Zeiss glasses and eye solutions as the “Pampers” and “"Jacuzzi” of ophthalmology. This is a very strong consumer/patient recognized brand for extremely high quality and consistency.

Latest quarter financials Q3 2023:

The YTD 2023 results in terms of top line are solid +13.3% revenue growth.

Gross margins are slightly lower, which is not a concern only -1.6 pts, but EBIT margins are 11.2% lower which is an area we should follow closely in the short run.

The growth in EPS is mainly attributed to currency exchange effects.

It is a business with a long-term focus (high R&D spending around 15% of revenue) with high gross margins and high EBIT margins.

We can see that R&D as % of Revenue is increasing while the revenue is also increasing. In the case of Zeiss Meditec AG we should definitely make the R&D adjustment. Capitalize the expenses into an asset and depreciate it. This will have a positive effect on profitability and earnings but will increase the capital employed number.

This strong and consistent R&D investments through the years is a very positive signal for current and future long term investors.

From company’s outlook:

In terms of business units:

The higher EBIT margin business unit (Microsurgery) is growing by 16.5% compared to the Ophthalmology business unit growth of +12.2%. This is very healthy development.

Look at this 50% market share in the highly profitable microsurgery segment.

I will dig in the balance sheet and the cashflow from the 2022 annual report:

Balance sheet:

Very strong balance sheet financed 70% through equity capital.

Cash Flow statement:

Cash flow from operations is sustainable to cover for CAPEX, cash acquisitions and dividends.

The development of the cash flows for the 9 months of 2023 is as follows:

Valuation:

The company is has a very profitable growth engine which was very overvalued during the low interest rate environment we witnessed in the past several years. I think that the higher interest rate environment is the main reason for the repricing of this high duration stock. In the 20x-10x EV/EBIT range this is definitely a good buy in my opinion. It is getting there, not a screaming buy for sure but an interesting watchlist addition (with a small entry position for me).

This is a high quality, high longevity business trading at a premium, so I will use my simple valuation approach with BV, ROE, CoE and earnings growth.

Intrinsic value = BV + BV*(ROE - CoE) / (CoE - EPS growth)

source: quickfs.net

I will use the following assumptions:

ROE 15% - I believe the business can keep the 15% ROE from the last couple of years

CoE 8% - I usually use 10% CoE, but for Carl Zeiss Meditec AG I believe 8% is fair

BV 22.70 euro per share

EPS growth 6% - I think that may be conservative given the past growth and the strong R&D investments. Some historical CAGR growth rates:

For the period 2013-2022 (the table above)

Revenue CAGR +7.4%

EBITDA CAGR +12%

EBIT CAGR +11.7%

FCF CAGR +10.2%

Book Value per share CAGR 11.1%

IV = 22.7 + 22.7*(15% - 8%) / (8% - 6%)

IV = 102 euro per share

PS

This whole writeup is a personal opinion and not an investment advice. Do your own due diligence.

Cheers and Good Luck!!!