Alcon Earnings: Strong Demand and Product Mix Raise Top and Bottom Line; Shares Still Expensive

Narrow-moat Alcon ALC reported second-quarter earnings that were ahead of our expectations. Total sales were up 9.2% year over year as strong performance from both surgical and visioncare units boosted the top line. Management raised guidance for full-year sales and diluted EPS on the backdrop of diminishing inflation and supply chain challenges, as well as healthy and resilient demand. After updating our near-term assumptions and adjusting for the time value of money, we raised our fair value estimate to $64 from $60.

Visioncare continued its solid performance and concluded another quarter of double-digit growth. Adoption of silicone hydrogel lenses, which carry a higher price tag compared with non-SiHy lenses, price increases, and the addition of ophthalmic pharmaceutical products from the Aerie acquisition fueled growth. We are impressed to see that trade-ups to SiHy lenses are continuing to happen from consumers given the inflationary environment, and we attribute this to Alcon’s strong intangible assets. We also see signs of recovery in supply chain challenges, so we expect a solid level of performance to continue in the back half of the year.

Surgical sales were up 6.6% thanks to healthy demand for Alcon’s equipment and consumables. We are happy to see strong performance in equipment because we believe newer machines with higher production capabilities require consumables with higher price tags, driving further demand for consumables. Intraocular lenses, or IOLs, had a weaker quarter in comparison, posting a year-over-year sales decline of 1.6%, but it was mainly due to an insurance reimbursement change in South Korea that raised out-of-pocket costs for IOLs (sales were slightly up excluding this impact). Management also noted entrants from competitors in the U.S. IOL space as potential headwinds, but we expect these to be minimal given the level of dominance that Alcon boasts in the IOL market.