Alcon Inc.

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

Alcon is a global medical device company specializing in the research, development, manufacturing, and marketing of eye care products. It operates in both the surgical and vision care markets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Alcon’s long-term goals are to maximize their near-term sales portfolio, deliver products and services that enhance people’s lives, build sustainable competitive advantages and have strong financial discipline. They aim to have a growth leadership and the profitability profile of a large-cap medtech.

Business Overview

Alcon operates through two segments: Surgical and Vision Care. The Surgical segment focuses on the development and manufacturing of surgical products, including instruments and disposables, used in cataract surgery, vitreoretinal surgery, refractive surgery and advanced technology, such as astigmatism management. The Vision Care segment includes contact lenses (spherical, toric, multifocal, and other specialty lenses) and ocular health products, such as dry eye relief drops, eye allergy solutions, and contact lens care products.

Revenue Distribution

  • Surgical: ~58% of 2023 net sales, comprising equipment and consumables for cataract surgery, vitreoretinal surgery, refractive surgery and other ophthalmic surgical procedures.
  • Vision Care: ~42% of 2023 net sales, consisting of contact lenses, lens care solutions, and ocular health products.

The sales for Alcon in 2023 were at 9.4 billion with surgical representing 5.3 billion and vision care representing 4.1 billion.

The eye care industry is characterized by:

  • Aging demographics, leading to increased instances of eye disorders like cataracts, glaucoma, and refractive errors.
  • Rising incidence of myopia, especially in developed countries, driving the demand for vision correction products.
  • Technological advancements in medical devices, leading to more effective and safer surgical procedures and products.
  • Increased awareness of eye health and access to eye care in emerging markets.
  • Increased usage of technology for diagnosis, treatment and contact lens use.

Growth in the global eye care market is expected at approximately 5 percent annually for the next several years. The markets in developed economies grow at approximately 2.5 percent, whereas emerging markets grow at approximately 7 percent.

Competitive Landscape

Alcon operates in a highly competitive market with multiple players, ranging from large, well-established medical device companies to specialized manufacturers, and new market entrants.

  • Surgical segment: competition from companies like Johnson & Johnson (Abbott and AMO), Bausch + Lomb and Carl Zeiss Meditec. These companies compete with their innovation of the latest technologies and brand recognition.
  • Vision Care: strong competition from Johnson & Johnson, CooperVision, and Bausch + Lomb. Companies compete in the areas of innovative technology, brands and pricing. In addition, some emerging companies with low pricing but similar benefits also create a competitive market for ALC.

What Makes Alcon Different?

  • Strong position in two major segments: Alcon is one of the few companies with a strong market presence in both surgical and vision care. They leverage their strength to get better margins and a bigger market share.
  • Innovative products and services: Alcon continually invests in R&D to develop cutting-edge products and services that meet the evolving needs of eye care professionals and patients, which they hope creates better profits and market share.
  • Global reach and established brands: Alcon has operations in 140 countries. Its brands are very well respected around the world. This helps their ability to be a stable business.
  • High margins and good cash flow: due to the business needing to reinvest in R&D and not fixed assets.

Moat Assessment: 3/5

Alcon has a narrow moat. It has some strong competitive advantages, especially in the form of a strong brand and good presence with both ophthalmologists and optometrists, but its profitability, while strong, is not high enough to be considered a wide moat, and is threatened by competition, new technologies and emerging markets.

  • Intangible Assets (Brands): Alcon has established itself as a leader in the market with some strong and well-known brands in both surgical and vision care. However, other strong global companies like Johnson & Johnson are right behind them and are constantly innovating in their respective industries.
  • Switching Costs: Contact lenses represent an item with low switching costs, even for daily users. For surgical equipment, customers like hospitals and clinics have higher switching costs. For most smaller practices and single doctors, this is lower. The need for equipment servicing and replacement and also the cost of retraining would help reduce the chances of clients moving to another supplier.
  • Network Effect: This is not really a major component of Alcon’s moat. Although, distribution networks and good connections are very important to the business.
  • Cost Advantages: Alcon has a huge scale advantage, but they still aren’t able to reach the same ROIC levels of some high-margin businesses. They are also constantly having to deal with commodity components prices.

Legitimate Risks to the Moat and Business Resilience

  • Technological Disruptions: the eye care industry is subject to fast and sudden changes, particularly because of the ongoing research and development in related industries.
  • Increased Competition: New products and procedures may erode Alcon’s current competitive advantages. Alcon competes with large and established players, which have more resources to invest in marketing and development.
  • Regulatory Challenges: Alcon is subject to regulations in many different countries, which can reduce market access or restrict their growth.
  • Price Pressures: Pressure from managed care and other payers is pushing for higher quality product with lower prices and this could affect Alcon’s high margins.
  • Currency Fluctuations: the company has a global presence and is exposed to changes in the exchange rate, causing revenues and profits to be affected positively or negatively.
  • Supply Chain Challenges: Supply chain problems and disruptions can cause severe issues to businesses, especially during this volatile time. Alcon has had issues in the past that they had to overcome, and may have to deal with them in the future.
  • Management Issues: While their management has shown improvement and dedication, they have made many bad acquisitions. Management needs to focus on getting their acquisitions right, and also to ensure that they have the right incentives to make the right moves in the future.

Financial Overview

As of December 31, 2022, Alcon’s revenue was 8.7 billion USD. The company had cash and cash equivalents worth 1.5 billion, and long-term debt of 4.8 Billion. Their operating income was 1.1 billion, giving an operating margin of about 13 percent.

Historical Financial Performance

  • Revenue growth: Alcon has a strong record of organic revenue growth and have had consistent growth over the past few years. A decline was recorded in 2020, because of the pandemic, but their revenues have recovered after that.
  • Profitability: They have shown good profitability and have consistently made high return on capital in the previous years, while their margins are still high, they have not been at the level as before, because of high inflation and supply chain issues.
  • Balance sheet: Alcon had a good level of cash that is above their debt level. However, there is a substantial amount of debt that they need to manage.
  • Cash flow: The company generates strong cash flow from operations, which supports its investments and growth plans.

ALC is facing headwinds because of increased cost of goods sold and manufacturing, which is caused by the higher transportation, labor and raw material costs. While they have been able to handle this in the short term through efficiencies, cost control and price increases, long-term effects can hurt the company if they can’t optimize their costs.

Current Financial Situation

  • Revenue: In 2023 Alcon’s net sales grew 7% at CER and the Vision Care and Surgical sales were $4.1B and $5.3B, respectively.

  • Margins: The margins at Alcon are still good. Gross margins were reported at around 64.9%.
  • Debt: They had a total debt of 4.4 billion USD as of 2023, but also had cash reserves of around 1.2 billion USD.
  • Earnings: In 2023 their basic earnings per share grew from $0.26 to $0.76, and Core earnings per share grew from $2.58 to $2.74

In Alcon’s latest earnings call, the company mentioned that they are focusing on improving margins, and are hoping to get their margins back up to the levels of 2017 and 2018.

Understandability: 3/5

Alcon’s business model is not overly complex. The company produces and sells various medical products, and their revenue and profit streams are easily predictable. But the medical devices and procedures that they sell and make are quite complicated and would make it more difficult to make decisions. The financials can be easily analyzed, but because it is a global company with varying segments, and with the complex interplay of global markets, different currencies, and different accounting policies, it does make understanding more complicated. Because of this, we’d rate it a 3 out of 5.

Balance Sheet Health: 4/5

Alcon’s balance sheet is generally solid and healthy.

  • Cash position: They have a good cash reserve to cover any possible problems.
  • Debt: Their debt is somewhat high relative to their equity, however, is not excessively high. Their debt management, based on previous reports, is adequate.
  • Current Ratio: The company has sufficient current assets to cover their current liabilities. This shows that their short-term liabilities are covered.

Conclusion

Alcon Inc. is a leader in the eye care industry and has consistently generated a good revenue and growth, although it also has a lot of competition and may face some problems due to technological disruptions, and the changing economic landscape. Their business is easy to understand, with predictable profits and they operate in stable industries, they are a good choice for any prudent long-term investor. Because their moat is not overwhelmingly wide and their valuations are not cheap, a rating of 3/5 for moat was warranted. Their financials are also really good, providing a balance sheet with sufficient safety. Because of this, the overall rating of the company was good.