Analyst Note| Anna Baran |
We plan to increase our fair value estimate for contract manufacturer Lonza by about 3% due to favorable trends in business segments that are benefiting from mitigation efforts to stop the spread of COVID-19, such as vitamin production, microbial control solutions, and professional hygiene, as well as the impact of time value of money since our last update. Overall, Lonza's business has seen only modest headwinds from the pandemic as its manufacturing businesses are deemed essential in most markets. Further, we have not seen material changes in bookings from large pharmaceutical firms during the crisis, and this client base contributes the bulk of the firm's revenue from the narrow-moat drug manufacturing segment. Although Lonza is currently minimally vulnerable to plant shutdowns, we think the business will be impacted in the likely event that the pandemic brings the global economy into a recession, with lower demand across most of its business segments impacting 2021 results. We view shares as overvalued, with the market extrapolating the narrow-moat company's recent strong growth and largely ignoring the impact of a recession on Lonza's earnings.