This article first appeared in The Telegraph magazine. Quaestor column.
A stock market rule of thumb is that large acquisitions tend to destroy shareholder value. Spin-offs, on the other hand, have an encouraging habit of being more likely to be created.
A case in point is Alcon (CH:ACL), the world’s largest manufacturer of disposable and reusable contact lenses, as well as equipment such as lasers and microscopes used in eye surgery.
Because the Geneva-based group was spun off from the AAA-rated Swiss pharmaceutical giant. Novartis (CH:NOVN) five years ago, previously weak sales rose nearly 30%, while last year’s underlying earnings before interest and tax rose more than 50%.
The value of the listed business has risen by just over a quarter to 35.2 billion Swiss francs (£30.7 billion) in five years, and a steady improvement in cash flows has allowed Alcon to begin paying a modest dividend.
Analysts forecast the business to be the same or better in the coming years in terms of sales, profits, margins, earnings per share and dividends.
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This is an impressive result, especially considering that two of the five years of independence were overshadowed by the pandemic, which brought eye surgery to a virtual standstill. And it’s caught the attention of some of the world’s best-performing portfolio managers, eight of whom now own the stock.
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These investors are among the top 3% of the 10,000 stock portfolio managers Citywire tracks. Their conviction has led Alcon to receive an AA rating from Citywire Elite Companies, which ranks the companies they support with the world’s top investors.
Top-performing manager Alistair Witte, who holds Alcon shares in several portfolios including the Comgest Growth Europe fund, initially bought the stake on the basis that the Novartis-owned business had been neglected and he now has the freedom to pursue growth opportunities while improving. efficiency.
“The facts show that Novartis was essentially starving Alcon of needed capital while at the same time creating enormous costs and processes,” he said. “Alcon was in an ideal position to improve its innovation and therefore the growth it has achieved since becoming independent. It was a great success story and flourished in its own right. That’s why we still really enjoy it.”
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Autonomy meant that Alcon’s management could tighten processes and cut costs, significantly increasing revenue and boosting margins. The company has also been able to channel more money into research and development (R&D), which in turn helps launch new products.
To illustrate, Alcon’s underlying operating margin has increased from 16.9% to 19.7% since the spin-off and is projected to reach 23% by 2026. the company accounts for 9% of sales, up from 8% when it was owned by Novartis.
Several trends are helping to support Alcon’s growth.
First, the ophthalmic surgery and eye care markets are huge and growing: Alcon estimates that the two companies have annual sales of $34 billion and are projected to grow at mid-single digit percentages every year between now and 2028 .
This increase is expected to accelerate as the population grows and ages, as a growing proportion of older people are more susceptible to diseases such as cataracts and glaucoma.
In addition, there is a huge unmet need for treatment among people suffering from diseases such as dry eye, which affects approximately 1.4 billion people worldwide. As technological advances make treatment more affordable and accessible, the markets in which Alcon operates will grow even further.
Finally, Alcon’s customer base among prescribers and consumers tends to be very loyal. As Whittet puts it: “It is generally true in medicine that doctors tend to be risk-averse, and for good reason. If they know something works, they will stick with it.”
This dynamic has not gone unnoticed by the broader market, and Alcon shares are not cheap; they trade at 25 times projected earnings for the next 12 months. However, the real appeal of this company to some of the world’s most successful professional investors is its potential for highly profitable growth over many years. It’s a prospect worth paying for.
| Key facts – Alcon AG | |||
|---|---|---|---|
| Market capitalization | CHF 35.6 billion | Price | CHF 71.20 |
| 52 week high/low | CHF 77.60 / CHF 61.28 | Return on invested capital | 4.7% |
| Highest price per profit | 25.0 | First dividend yield | 0.4% |
| Fastest EPS Growth | 13.4% | share price for 12 months. | 10.8% |
Source: FactSet. EPS = earnings per share. Forecasts for the next 12 months.