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Headquartered in Switzerland, Alcon (ALC) is a global leader in optical healthcare solutions. Notably, a considerable portion of total company sales are recurring in nature. The business operates through 2 segments:
## Surgical Care - 55% of sales
* 16% - surgical equipment for treating cataracts, glaucoma, refractive & retinal procedures
* 31% - intraocular lens (IOL) implantables for monofocal, glaucoma, and other conditions
* 53% - consumables such as surgical packs, eye drops, and tools
## Vision Care - 45% of sales
* 39% - eye drops for dry eye, allergies, glaucoma, and contact lens care
* 61% - contact lenses - daily, reusable, and cosmetic lenses
## Metrics
* P/E - 24x, P/FCF - 25x
* ~56% gross margins, ~15% FCF margins
* $9.9B revenue, has grown at almost 6% over the last 5 years, margins have been expanding
* Forecasted EPS growth: 11% in '26, 16% in '27
* $39B market cap, $3.7B of net debt, 1.3x debt/EBITDA
## Peers and Competitors
* Johnson & Johnson (JNJ) - Contact lenses, ophthalmic technologies for cataract and laser refractive surgery. Eye care is ~10% of JNJ total sales
* Cooper Companies (COO) - Contact lenses. Eye care is about 2/3 of sales.
* Bausch + Lomb Corporation (BLCO) - Contact lenses, ophthalmic pharmaceuticals, surgical equipment.
* Carl Zeiss Meditec (CZMWY) - Ophthalmology examination, surgical, and care products. Eye care is about 3/4 of sales.
* STAAR Surgical (STAA) - implantable intraocular lenses (IOL) for vision disorders *- Alcon has been trying to acquire*
## Global Trends
About 1/3 of the global population currently has myopia (nearsightedness), with projections suggesting as much as 50% of the population by 2050.
Contacts in particular are a $10B+ oligopolistic market with Alcon having about 25% market share, Johnson & Johnson having around 35-40%, and Cooper having another 25%. Alcon and Cooper's market share have trended slightly up over time, while JNJ's has slightly declined. The contact lens market has reliably grown at mid-single digits over the last decade, with recent years around 7%.
Cataract surgery volume has grown at a 4% rate over the last decade. Global population for 65+ has grown at a 3.5% rate over the last decade.
## Warning Flags to Consider
* Low returns on invested capital, although improving
* Moderately high capex, although has been declining in recent years
* Almost 10% of sales spent on R&D, suggesting a steady demand for innovation
* No share buybacks, negligible insider ownership
* Uncertainty around STAAR Surgical acquisition
## Why Alcon?
Alcon is the largest pure play in the optical healthcare space, an industry expected to grow in excess of GDP. Its business generates significant recurring revenue through contact lenses and care products, as well as surgical consumables. Consumers tend to stick with the same contact brand, so long as it's comfortable, functional, and recommended by their ophthalmologist. While there isn't strong brand loyalty or high switching costs, churn is relatively low. Alcon's CEO estimates the average patient keeps the same contact lens type for 4.5 years, but many patients stick with the same ones for 20+ years. On the surgical side, once surgical equipment is installed, those machines create a stream of recurring revenue over the life of the machine.
Compared to contact lenses, surgical equipment has higher switching costs, both in terms of the actual equipment as well as surgeon comfort and familiarity with the system. If successful in acquiring STAAR, Alcon will have **the** dominant, globally leading position in IOL implantables. Contact lenses require specialized manufacturing as well as FDA approval and regulation, creating some barriers to entry on the production side. Surgical equipment is also highly technical, creating a limited number of globally accredited manufacturers. Proprietary lens technology for both contacts and implantables also protect the business. Together, these dynamics give Alcon somewhere between a narrow and wide moat, although probably closer to wide.
## Stock
In terms of valuation, the stock isn't a bargain at today's prices but given the long-term growth potential, isn't totally unreasonable either. Eye care is an essential and recession-resistant industry, which should provide steady returns, although explosive/rapidly accelerating growth is unlikely. There are several key tailwinds for the company, such as growing myopia rates and aging populations, providing a potentially safer way to play demographics trends compared to other healthcare industries such as pharmaceuticals.
Margins should also continue to trend upward over time. 6-7% organic top line growth seems attainable over the long-term, perhaps closer to 7% if they can continue to take market share. The company has also done several acquisitions over the last 5 years and is currently trying to complete another. M&A could contribute another 1-2% of revenue growth over a longer timeline. Combine with some margin expansion and low double-digit EPS growth looks reasonable. The company also pays a small dividend of around 0.4% and could potentially buyback shares in the future.
Altogether, somewhere around $70/share would be an attractive buy price to me, which equates to LDD EPS + small dividend + long-term secular trends and recession-resistence for ~22x earnings.
**While Alcon isn't necessarily cheap today, does the company or vision care industry in general look like a compelling long-term opportunity?**