Convatec Earnings: Focused Turnaround Plan Yields Early Results

ConvaTec reported first-half interim results that displayed favorable signs of its turnaround taking hold, but there were few surprises that would cause us to change our underlying assumptions through the midterm. We’re leaving our fair value estimate unchanged. Considering ConvaTec ran into rough operational waters soon after it returned to publicly traded status, the firm is finally moving in the right direction on the top- and bottom lines under the leadership of CEO Karim Bitar. The turnaround plan to address execution shortfalls and remedy the long-standing dearth of investment in continence care and ostomy (that left ConvaTec less able to compete) has been demonstrating early signs of improvement. Though there is still a considerable ways to go yet, we think ConvaTec is on the right track. Moreover, we think it’s worth recognizing that even in the earlier throes of chaos, ConvaTec continued to earn economic profits, which suggests there are structural advantages in its business that shield it from all-out price competition and support a narrow economic moat.