Carl Zeiss Earnings: Soft Readout, Continued Market Challenges, and Dividend Cut Send Shares Down

Narrow-moat Carl Zeiss Meditec reported soft fourth-quarter earnings that came in lower than our expectations and ended the year on a soft note. Total sales of EUR 580 million during the quarter were flat year over year, but full-year sales were down 1.1%, marking the first time Zeiss failed to deliver top-line growth since the covid-affected 2020. The main culprit was the microsurgery segment that saw sales drop over 14%, or 7% for the full 12 months, and created headwinds that the fair performance from the ophthalmology segment, which was up 5.2% during the quarter and 0.8% for the full year, could not offset. As we noted many times throughout the year, a challenging macro environment, high interest rates, and uncertain consumer sentiment weighed down investment appetite. Furthermore, the sluggish China market driven by the reduction in certain surgical consumables inventory resulted in tough comparisons. Given the continued challenges in the environment and management’s expectation of slow recovery in the investment climate, we trim some of our near-term assumptions and lower our fair value estimate to EUR 73 per share from EUR 77. While the return to normalization in the market has been slower than our original forecast, we think the cyclical troughs are largely past us and believe Zeiss is well equipped to enjoy positive long-term trends. Shares were depressed after earnings, down about 12% at the time of writing, and we think patient investors who are willing to hold the stock until market recovery could enjoy healthy upside on the name.