Barron’s Likes Alcon’s Prospects In Emerging Markets, Thinks It Could Lead to Bausch Spinoff

Last week, Novartis(NVS) completed its spinoff of Alcon(ALC). Less than a decade ago, Novartis had purchased Alcon from Nestle(NSRGY), but new leadership decided to reverse the transaction. In an article this weekend, Barron’s suggests that there is more than meets the eye to Alcon.

Barron’s notes that, on the surface, Alcon looks expensive.

For now, Wall Street is wrestling with the company’s lofty valuation. The shares trade for 29 times projected 2019 earnings of $1.91, a premium relative to many medical-technology companies and the S&P 500 index, which fetches about 17 times 2019 profits. Its closest competitor, Cooper Cos. (COO), trades at 24 times projected earnings of $12 a share in the company’s fiscal year ending in October. Another negative will be a low, initial dividend yield projected at less than 0.5%.

However, they point out, that while myopia is rising worldwide, “contact lenses … remain uncommon outside the U.S., Western Europe, and Japan.” Barron’s believes this growth will justify the company’s valuation and still provide attractive returns for investors. They also points out that health-care spinoffs have done well historically.

And health-care spinoffs in the past two decades have tended to do well, including device-maker Zimmer Biomet Holdings from Bristol-Myers Squibb and drug and device maker Hospira from Abbott Laboratories.

Already, Alcon sees emerging country growth in its largest business, supplies for cataract surgery.

Alcon sees double-digit annual revenue growth in emerging markets—driven by China, Brazil, and Russia—as greater affluence leads to increased demand for cataract surgery, which accounts for the bulk of its surgical revenues.

All of this leads Barron’s to this conclusion:

The knocks against Alcon are that it is richly valued for a company that could generate modest 5% annualized revenue growth in the coming years and that improvements in margins are already priced into the stock.

Valuation is indeed a legitimate issue, but that seems outweighed by the company’s market-leading position and attractive demographics.

In a separate article last week, Barron’s suggested that the Alcon spinoff should lead Bausch Health(BHC) to consider spinning off B+L, the former Bausch+Lomb. Bausch, some may recall, used to be called Valeant, a stock which achieved some notoriety a few years back. It has continued to restructure its business and a potential spinoff of B+L has been discussed before. Barron’s notes that the rich valuation that greeted Alcon’s spinoff should encourage Bausch to follow suit. An independent Bausch+Lomb could have a multiple double or triple the current Bausch Health business. That would be a rich result for long-suffering Bausch holders indeed.

Disclosure: The author holds no position in any stock mentioned