We are reiterating our BUY rating on Alcon Inc. (NYSE: ALC), Alcon posted weak 3Q results due to restrictions on surgical procedures and the closure of medical offices, and management does not expect revenue to return to prepandemic levels until early 2021. However, we have a favorable view of the company’s market position and product pipeline, and note that its PanOptix lens has achieved a 70% market share in the U.S.
A lcon shares have outperformed the benchmark over the past three months, with a 15% gain, compared to a 14% advance for the EAFE ETF (EFA). They have also outperformed over the past year, rising 14% compared to a 6% gain for the benchmark. ALC has underperformed the US Healthcare industry (ETF = IYH) since it began trading in April 2019.
A lcon is based in Switzerland and reports results in U.S. dollars. On November 10, Alcon reported 3Q20 revenue of $1.8 billion, down 1% in constant currency. It posted diluted core earnings of $0.39 per share, down from the comparable $0.46 per share in 3Q19, but above the consensus forecast of $0.23.
The pandemic has had an impact on results, particularly on demand for the company’s products. In response to the pandemic, the company reduced costs substantially and pivoted to digital technology to increase customer engagement. In the third quarter, Alcon’s salesforce implemented digital marketing campaigns and virtual training programs to stay better connected with customers during the pandemic.
On the product development front, Alcon has launched Pataday Extra Strength, which provides 24 hours of eye allergy relief. The new OTC product replaces the company’s prescription medication Pazeo. Alcon has also obtained European regulatory approval for an artificial tear product, Systane Ultra Multi-Dose Preservative-Free.
Due to COVID-19-related uncertainty, the company has not provided 2020 guidance. Management noted that its third-quarter forecast for the COVID recovery has played out as expected. However, it also noted that in the past several weeks, the surge in COVID cases has made it more difficult to estimate the pace of further recovery. Management previously projected 2020 net sales growth of 5%-6% (in constant currency), a core operating margin of 17.5%-18.5%, and EPS of $1.95-$2.05.
EARNINGS & GROWTH ANALYSIS
lc on reports revenue in two segments: Surgical (55% of revenue); and Vision Care, (45%). Third-quarter results for these segments are summarized below.
Turning to our estimates, based on recent revenue and margin trends, we are lowering our 2020 core EPS forecast to $1.05 from $1.08. Our estimate implies a 44% decline in EPS in 2020. We look for growth to resume in 2021 but are trimming our EPS forecast to $1.95 from $1.97.
FINANCIAL STRENGTH & DIVIDEND
The company’s board had proposed a dividend of CHF 0.19 per share in 2019 (approximately $0.19), its first payout as an independent company. However, a shareholder vote on the proposal has been pushed back to 2021. Pending the outcome of this vote, our dividend estimates are zero for 2020 and 2021.
MANAGEMENT & RISKS
David J. Endicott is the CEO of Alcon and a member of its board. Mr. Endicott joined Alcon in July 2016 as COO. Prior to joining Alcon, he was president of Hospira Infusion Systems, a Pfizer company, which he led through a turnaround, spinoff, and divestiture. Tim Stonesifer serves as Alcon’s CFO. Prior to joining Alcon, Mr. Stonesifer was the CFO of Hewlett Packard Enterprise.
Alcon has announced a ‘multiyear transformational program.’ The company expects the program to cost $300 million and reduce operating expenses by $200-$225 million annually by 2023. The savings will be used in part for new product development. In the third quarter, transformation costs were $14 million.
Investors in ALC shares face risks. The company may fail to innovate and could face increased competition from new products, lowering revenue and earnings. Results may also be hurt by unfavorable currency translation. The pandemic has reduced demand for Alcon’s products, which has led to lower earnings.
We believe that ALC shares are attractively valued at current prices near $65, near the high end of their 52-week range of $39-$68. From a technical standpoint, the shares are in a bullish pattern of higher highs and higher lows that dates to March 2020.
On the fundamentals, ALC has a short trading history, as it was spun off from Novartis in April 2019. It is trading at 33-times our 2021 EPS estimate, reflecting depressed earnings that, in our view, are not indicative of the company’s long-term potential. We expect Alcon to benefit over time from its strong product pipeline and to post stronger results as surgical volumes recover. Our rating remains BUY with a revised target price of $72.
On January 5 at midday, BUY-rated ALC traded at $66.48, up $0.80.