Company Reports

Convatec finished the year with increasing strength, and we’ve increased our fair value estimate to $13.80 (GBX 271) per share. While green shoots since 2022 demonstrated mild progress as Convatec sought to engineer a turnaround, the last six months have been an inflection point, and we think the firm is firmly on the path to realizing its potential. While the rise in medical utilization likely boosted Convatec’s performance in 2023, the firm had also invested in its innovation and commercial organization and was prepared for these favorable conditions. We’ve long thought that Convatec had the ingredients to support a narrow moat, and the firm is getting closer to realizing that potential as it rides a wave of new product launches.

Since its initial public offering, Convatec has followed a familiar playbook to press its advantage in advanced wound care and to enhance its ostomy business. By and large, we like Convatec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for Convatec to remedy the situation, and management has been making notable progress.

Convatec’s abbreviated trading update featured solid third-quarter growth across all four product segments, and the firm remains on track to meet our full-year expectations. We’re leaving our fair value estimate unchanged. The firm has made considerable progress on operations over the last few years, and it also benefited from the highly consolidated ostomy, continence, and infusion care markets where it remains a significant competitor. Though Convatec continues to trail its main rival, wide-moat Coloplast, it has taken steps forward to introduce innovation that bolsters the intangible assets that support Convatec's narrow economic moat.

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.

Since its initial public offering, Convatec has followed a familiar playbook to press its advantage in advanced wound care and to enhance its ostomy business. By and large, we like Convatec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for Convatec to remedy the situation, but its ability to execute hinges greatly on new management.

Convatec continues moving forward with efforts to reshape its product portfolio, leaning toward more chronic care and innovative technologies and away from the acute-care setting. Considering that these shifts will take time to show up in financial results, our modeling assumptions are unchanged and we’re holding steady on our fair value estimate, which remains moderately above recent share prices. We remain confident that strategic decisions under CEO Karim Bitar should reinforce the company's narrow economic moat and potentially nibble away at the growth and profitability gap with rival Coloplast, as Convatec gets closer to commercializing some of its differentiated pipeline products. We’re watching the recent U.S. launch of ConvaFoam carefully, as this provides Convatec with entrée to the largest subsegment in advanced woundcare and fills a key gap in its portfolio. Importantly, increased medical utilization should provide a healthy tailwind through 2023, especially for woundcare and ostomy.

Since its initial public offering, ConvaTec has followed a familiar playbook to press its advantage in advanced wound care and to enhance its ostomy business. By and large, we like ConvaTec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for ConvaTec to remedy the situation, but its ability to execute hinges greatly on new management.

ConvaTec wrapped up 2022 in solid fashion, and we’re comfortable that the firm has strengthened its foundation, which sets the stage for improved innovation and operations despite nagging challenges with rising input costs and wages. With few surprises in fourth quarter, the firm nearly matched our estimates, and we’re leaving our fair value estimate unchanged. We’ve also seen little to change our view of ConvaTec’s narrow economic moat and believe the underlying user switching costs, especially in ostomy and continence care, bought the company time to nudge innovation into the product pipeline. The firm has begun to reap the rewards of that innovation through the adoption of three new products in 2022.

Narrow-moat ConvaTec released year-to-date revenue growth (covering the first 10 months of 2022) that generally matched our assumptions for the full year. After making slight adjustments for unfavorable foreign currency exchange that were offset by cash flows realized since our last update, we’re holding steady on our fair value estimate.

Since its initial public offering, ConvaTec has followed a familiar playbook to press its advantage in advanced wound care and to enhance its ostomy business. By and large, we like ConvaTec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for ConvaTec to remedy the situation, but its ability to execute hinges greatly on new management.

ConvaTec’s interim report for the first half of this year featured reported financial results that have the firm closely tracking our full-year expectations, and we’re leaving our fair value estimate unchanged. We’re pleased to see year-to-date organic revenue growth at 6%, which is a touch faster than the mid-single-digit level that has characterized ConvaTec’s markets. Operating margin is also consistent with our full-year estimates. We remain comfortable with ConvaTec’s narrow economic moat, which rests on intangible assets and end-patient switching costs.

ConvaTec posted abbreviated revenue results for the first four months of 2022 that put the firm on track to meet our full-year expectations, and we’re leaving our valuation for U.S. shares unchanged, but slightly raising our fair value estimate for local U.K. shares to reflect underlying changes in foreign exchange. Organic 6% consolidated revenue growth was driven by advanced wound care, continence care, and infusions sets. Not surprisingly, ostomy growth remains mired in the low single digits, and will likely remain in that range considering the flow of new patient discharges ultimately determines the pace of adoption. We remain confident in the structural integrity of ConvaTec’s narrow economic moat, which stems from intangible assets as well as switching costs for patients. Though the pandemic exerted pressure on ConvaTec’s non-pandemic related business—including advanced wound care, ostomy, and continence care—the firm is already showing signs of resumption in growth as non-COVID surgical procedures have begun to return following the omicron surge.

Since its initial public offering, ConvaTec has followed a familiar playbook to press its advantage in advanced wound care and to enhance its ostomy business. By and large, we like ConvaTec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for ConvaTec to remedy the situation, but its ability to execute hinges greatly on new management.

ConvaTec posted full-year results that ran slightly ahead of our expectations on the top and bottom lines, but not enough to materially shift our fair value estimate. On the whole, we’re heartened to see some green shoots as ConvaTec persists in its turnaround, which has been hindered by the pandemic. We were pleased to see 2021 revenue grow 6% in constant currency, fed by strength in advanced woundcare and infusion sets. This is very respectable top-line growth--the strongest we’ve seen since 2014--against decent 2020 performance that held up to COVID-19 relatively well. We think this progress underscores our view of the narrow moat at ConvaTec, which benefits from structural advantages in switching costs and intangible assets.

Since its initial public offering, ConvaTec has followed a familiar playbook to press its advantage in advanced wound care and enhance its ostomy business. By and large, we like ConvaTec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for ConvaTec to remedy the situation, but its ability to execute hinges greatly on new management.

All in all, ConvaTec saw solid third-quarter sales across most product segments that were consistent with our expectations, and we’re leaving our fair value estimate unchanged for now. Though ConvaTec faced foreign-currency headwinds, organic growth across the key segments remained respectable, with advanced woundcare up 5%, and both ostomy and continence and critical care up 2% versus the prior-year period, which itself was fairly solid. This leaves us comfortable with the progress management is making in improving execution. We see little to shift our thinking on ConvaTec’s narrow economic moat and think there’s the potential for newly acquired Cure Medical to reinforce ConvaTec’s intangible assets in the continence-care category with its hydrophilic intermittent catheters.

ConvaTec reported second-quarter sales that largely met our expectations, and based on first-half financial results, the firm is on track for our full-year projections. We're leaving our fair value estimate unchanged. In a show of fortuitous timing, ConvaTec’s performance improved in the first few quarters after Karim Bitar assumed the CEO role. We had a hard time attributing those positive results to Bitar at the time and believed they were more likely the result of whatever his predecessor was able to implement before leaving. Then, the pandemic took over as a disruptive factor in 2020. The most recent quarter is the first that we think captures a more normal state for ConvaTec currently. Importantly, management’s methodical analysis and formulation of strategy, which is now still in the relatively early stages of implementation, give us confidence that the appropriate foundational work is being done to put ConvaTec on stronger competitive footing. Nonetheless, these building blocks may take some time, which means we could see some fits and starts from quarter to quarter in the near term.

Narrow-moat ConvaTec reported first-quarter revenue results that slightly exceeded our expectations, especially in advanced wound care. However, this wasn’t enough to materially move the needle on our valuation, and we’re holding steady on our fair value estimate. While the previous management team had made a hash of execution, we’ve long been fans of ConvaTec’s underlying businesses, which we believe benefit from structural moat sources, including switching costs. Under new CEO Karim Bitar, ConvaTec seems to be finally making good on its potential, and first-quarter results suggest the long-awaited turnaround is underway.

At the end of third quarter, narrow-moat ConvaTec indicated that it would likely see revenue growth for the full-year 2020 wrap up near the high end of its outlook of 2.0%-3.5%. However, considering the resurgence of the coronavirus in late 2020, we’re holding steady on our expectation for 2.1% top-line growth and leaving our fair value estimate unchanged. We have slightly revised our projections for softer performance in the advanced wound care and ostomy segments, which was offset by more robust results from the infusion sets and critical care segments.

Since its initial public offering four years ago, ConvaTec has followed a familiar playbook to press its advantage in advanced wound care and enhance its ostomy business. By and large, we like ConvaTec’s businesses that focus on chronic care, which translates into an ongoing stream of revenue. However, the company has lagged significantly behind its key competitor, Coloplast. From our perspective, there is plenty of opportunity for ConvaTec to remedy the situation, but its ability to execute hinges greatly on new management.