Carl Zeiss: Uncertainty Rating Raised Amid Challenged End Markets and Margin Compression

We are raising narrow-moat Carl Zeiss’ uncertainty rating to High from Medium. The Morningstar uncertainty rating reflects quantitative analysis of the firm based on the return ranges used by our star rating system as well as short-term macroeconomic headwinds. While our view on the fundamental strength of the firm remains favorable, we think the challenged end market and the subsequent margin compression have severely weighed down share price. Despite macroeconomic conditions showing improvement, interest rates remain relatively high for the Americas and Germany, two key regions for the firm, and weighed down investment appetite among customers in recent quarters. We believe the recovery to the firm’s medium-term target of 20% core EBIT margin will take longer than previously thought. We maintain our fair value estimate of EUR 77 per share.