Convatec Earnings: Focused Turnaround Plan Yields Early Results

ConvaTec CTEC 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.

Though ConvaTec saw accelerating growth in most of its product segments, this performance was partially offset by its decision to exit the hospital-care business. Half-year revenue growth clocked in at 3%, fueled by advanced wound care and continence care, which were up 9% and 8%, respectively. We view this as meaningful acceleration of growth. Infusion sets also grew favorably at 8%, as new insulin pump cycles have begun. With the U.S. launches of Medtronic’s 780g and Tandem’s Mobi pump just beginning, we expect demand for infusion sets should remain strong through 2024.

We were also pleased to see reported operating margin of 12% in the first half match our full-year estimate for 12%. While we have projected operating margin to improve incrementally by another 100 basis points in 2027—if ConvaTec continues to drive up profitability on the strength of new products—we’ll need to revisit our estimates.