The main objective of this investing strategy is to get exposure to those businesses that were affected the most during the lockdown period and that are also expected to rebound the most.
Almost all of the companies that fell into this category are now hardly investable. Given the obviousness of the trade, the valuations at which these companies trade, already price in the whole economic recovery and more.
It is in this environment, where I personally try to come up with creative ideas on how to play this trend beyond the obvious. One of the results, has been Alcon Vision LLC.
Alcon sells vision health products. The company product pipeline that attracts me the most are daily disposable contact lenses. They are the reason why i am writing this article in the first place. Alcon Vision is the company with the highest revenue in the disposable contact lenses industry. In addition, contact lenses sales represent more than 30% of Alcon’s revenue.
So, why are we even talking about contact lenses? And why should investors be interested in such a product?
It sounds extremely foolish, but contact lenses are a reopening play. Let me briefly explain why.
I don’t use and never used contact lenses, therefore I barely remembered that existed. That was until I saw my roomate, who uses daily disposable contact lenses every day, arrive home with many boxes of new ones in a plastic bag. That was when suddenly a light bulb turned on in my brain.
I started interrogating my roomate to find more about the consumer conduct and profile in this industry. It turns out that during lockdown and work at home, he stopped using any type of contact lenses. Almost all of the consumers of daily disposable contact lenses don’t actually need them at home. At home they don’t need to look things that are far away, so those who used the lenses for long distance sight just don’t need them, and in the case of those, who used them for short distance, they can very easily set their monitors, desks, tv’s and so on, at a position in which they don’t have sight problems. You may have seen your Grandpa hold a book in a very strange way in order to read because he forgot his short distance glasses pair.
The conclusion I arrived after diving deep, with my friend’s help and other internet sources, is that daily disposable contact lenses and contact lenses in general became discretionary when the pandemic hit. They used to be a must buy for those who need it, as much as toilet paper for all of us, but with the lockdowns consumers realized they don’t really need to use them at home. Those who wanted to let their eyes rest, those who were not organized and changed their daily routine, together with those who wanted to save a bit of money, stopped buying these daily disposable contact lenses all at the same time.
However, as the pandemic fades away, the economy is reopening. My roomate, who is a university student, now needs these contact lenses again for class, which are no more virtual or online. On top of that, now everyone is going out at the same time and as a result all spaces are now packed. Any Starbucks is packed. The university classroom is packed. The library for students is packed. Even the train is packed. Under these conditions, people no longer is able to customize their environments as they please. For example in the library the space is reduced and you can’t always set the monitor or the chair in such a position that allows you to read without the perfect short distance glasses. On class the front row’s seats are no longer free, so you are lucky if you even have a place at the last row, but my roomate will again, need long distance glasses. In this kind of environment, old consumers of daily or any kind of contact lenses will look forward to buying them again. The contact lenses became once again a non discretionary expenditure for the people with sight problems. Another prominent example is sports. People that use contact lenses find them extremely helpful when they practice sports. Usually a pair of glasses not designed for sports would be imposible to use while running or during a badminton match. Therefore people that need lenses use contact lenses to practice sports. More than anything in sports that require precision and seeing an actual object like a ball.
It’s no wonder that during the pandemic people stopped their sport routines and many also gained weight. Now more than ever people that wants to reorganize their lives look forward to practice sport again. That will provide the contact lenses industry with many old and new customers. Finally, as the end of masks in our lives is still no where to be seen, masks tend to fog up lenses. In case an old contact lens customer found traditional glasses enough at home, this factor will make adapting to a live with traditional glasses for those old customers much more tedious. And of course many people that didn’t realize the existence of daily disposable contact lenses may find them a good alternative to their old pair of glasses. Personally, I can’t reasonably expect old customers not returning and I don’t see a chance of new customers missing as the economy reopens.
Now we already identified that daily disposable lenses and contact lenses as an industry is in fact a reopening play. Let’s figure out why it is not an industry that is usually recognized or taken into account in the pool of industries conforming the reopening play.
I think there are two main possible reasons for that. The first one is that the analysis needed to arrive at the conclusion that this sector is a reopening play is moderately complex. It is not as easy and straightforward as realizing that hotels will have more customers once the pandemic fades. It takes more time. I was helped a ton by my friend who is a customer and user of daily disposable contact lenses, so he was able to explain me the point of view from a customer. However, I doubt a non customer of these products that works at a bank would even have the interest to dig in so deep to realize that people stopped needing these contact lenses during lockdown and that they are starting to need them again. This will help us, who were interested enough to dig in deeper and found out about it.
The second reason is inherently related to the nature of having vision problems and needing external help from lenses. You either need them and are a customer, which could probably make you very interested in daily disposable contact lenses. Or you have perfectly functional eyes and never even thought about this industry, like me, who barely remembered its existence. On December 2017, 26.1% of US customers aged between 18 and 34 years wore contact lenses. In 2020 the results for European countries ranged between 25% and 30%. Sweeden standing at the top of that range and Netherlands and Cyprus on the 25% level. Not only do this figures show how big the addressable market is for these products. If we think about the data in a different way, we can realize there is an investing bias generated by the “alienation” of people that don’t have eye problems with this sector. It is a bit complicated so I will explain it deeper in a separate paragraph, but it’s still the core of the second reason we are detailing.
If only 25% - 30% of people use contact lenses and therefore are aware about the industry. Given how particular and distant this industry is for the rest of the people, we could assume that the vast majority of the 70% to 75% of the people are, in the best case, uninterested in the industry and in the most probable completely unaware of the existence of these products and their importance in the live of the other 30%.
If we have a pool of 100 investment fund managers and we ask them to invest our money in the reopening of the economy. Out of the 100 I would say that 100 of them would at least think or consider buying hotel stocks or airlines stocks. The reason behind that is their live experience. Most probably, all of them went to vacation in an hotel before the pandemic or traveled by plane with some airline. These are the industries they are exposed the most in the pool of industries, that they personally consider, fit their client’s interest the best.
When talking about the contact lenses industry, the results are completely different. 70-75 of the 100 have never even used contact lenses (like me). If they barely know the industry exist, it’s almost impossible they would think about investing in the industry. For that reason, we can say that in the worst case scenario, 75 of the 100 investment managers won’t include the daily disposable contact lenses industry in the pool of industries that they design according their clients interests. It’s not because they don’t think, for example after reading this article, that the industry is in fact a reopening play. It’s because their live experience biased them and the industry wasn’t even available in their head’s industry repertory by the time their brain generated a pool of industries worth to research more.
Out of the other 25 fund managers that know the industry, even here only a fraction would incorporate this particular industry in their “reopening play pool”. Even tough they are aware of the industry and are customers too, in contrast to the other 75 managers. The reason why only a tiny percentage of these 25 would be interested in research more this industry to fit their client’s needs, is because this industry doesn’t look as a reopening play for most people and it’s not so obvious as many other. I could think of more than a hundred companies that would cross my mind way before the contact lens industry. It’s just not so obvious. And even if someone of these 25 people consider it, it’s not guaranteed that the conclusion they arrive at, after researching it just like we did, would be the same as the one I propose here. Therefore, they may discard it as a potential candidate. I haven’t done any experiment with 100 fund managers, although I would love to, but I guess that out of these 25, no one would think about the contact lens industry. At best 1, but I would say that would even be extremely unlikely.
When they would start thinking about it as a potential candidate, it will start with that 25%. It will only happen after some months very well into the reopening, when they as a consumers will realize the opportunity. They will start thinking about how much they use contact lenses now compared to during lockdown, but by that time, the rally on the industry will have already started and they will be late.
One argument that plays pretty much in favor of these theory is the barely existent financial press coverage of Alcon as a company. The low volume also reflects the absent interest from investors. The only buyers right now are the indexes and all the investors will come only after earnings results that don’t fit the forecasts designed by people with few interest at some banks. Then the narrative will change.
In the meantime, 80 out of the 100 managers will pump the valuations of companies in the more obvious industries, while the valuation of the contact lens industry will remain almost unchanged and will present a huge and unique opportunity to some investors that happened to find it and realize that it was an opportunity to play the economic reopening in an extremely cheap way.
After all this analysis, a great question would be why Alcon LLC? Why not invest in any other company in the sector. I have researched the companies in the sector and I ended up with the conclusion that Alcon was the best way to play the industry’s rebound. Competitors include Cooper Vision, Bausch & Lomb and many more.
Out of all of them, Alcon is the most exposed to the daily disposable contact lenses market. All of the other have huge market caps because they are pharmacy companies with a huge product pipeline and sales of contact lenses represented a lower percent of total revenue than Alcon. In fact, contact lenses was only a tiny fraction of their business. This is explained with the Spin-off of Alcon from Novartis in 2019. This is for me completely mind blowing and a huge coincidence that will let us, investors, play the industry with way more exposure than what we are usually used to. Because Novartis sold the business related to eye products and eye healthcare, Alcon is now the purest player in this particular market.
In addition, Alcon is the company with the most revenue generated from contact lenses sales (30% of total revenue) the one with the best products and the one that has invested the most in research and development of this kind of products. As an example, Cooper Vision sold only 400 million USD on daily disposable contact lenses, whereas Alcon sold 4.5 Billion USD. Meanwhile, Cooper Vision’s Market Cap is 20B USD and Alcon 37.5B USD. Personally, I would say there’s no doubt Alcon is the leader in the market and also the best way to play this industry and trade.
My strong belief in such a distressed environment is another factor that lead me to the conclusion that Alcon is the best choice of a company in this industry. Under a supply shortage, Alcon’s competitors that do not focus exclusively on eye health care and whose sales of contact lenses only account for 5% of total revenue will be extremely unprepared and underinvested to cope with the surging demand. They won’t be able to profit and increase production because they won’t be ready and are not focused enough on that tiny part of their business. Even more, if prices of the materials used for producing daily disposable contact lenses rise because other producers that were ready, like Alcon are buying much more raw materials to produce their lenses, the profitability of these unprepared competitors may even get harmed under these circumstances.
Unlike them, Alcon is extremely focused on the production of these products, simply because a much bigger part of their revenue comes from those sales. In Alcon’s case as much as one third of total revenue. In addition, it will also help Alcon that the other business activities accounting for 70% of total revenue are closely related to the daily disposable contact lenses. For example, they also sell eye drops and permanent contact lenses that are implanted by professional doctors in eye operations. Alcon could easily adapt its production lines of those products and redirect them to producing daily disposable contact lenses without the need to spend in completely new machinery that may not be available at the moment due to the high demand to produce contact lenses. That is a benefit Alcon gets from being an ultra focused company in eye health products. And remember Alcon is like that only because it was a subsidiary from Novartis that got spun off. All of its competitors have an extremely different revenue structure that goes way beyond products for the human eye.
Unlike Alcon, it’s competitors will be so diversified that won’t be able to increase or ramp up production. They would need to construct new assembly lines from scratch with brand new machinery that will be much more expensive then compared to current prices. This whole situation may not even benefit them at all.
One interesting fact from Alcon that I also love, is that their products are not fabricated in china. In fact, Alcon owns 11 production and research facilities, out of which 5 are in the US and more than 3 in Europe. That will also be very helpful to avoid freight / shipping costs that may increase during peak seasons, like christmas. These increasing shipping costs will also put Alcon in a position of advantage against its highly diversified competitors, since most of them have factories only in one region or continent, like the US. Then they ship the production to other regions were the contact lenses are sold . If all their daily disposable contact lenses supply comes from one place, the competitors may not even have the products where consumers need them because of shipping delays or they may need to raise their selling prices according to the increasing/decreasing costs of shipping.
Being exempt of these problems, Alcon’s products may be the only ones available at a given moment on a specific region or their prices may be much more lower than the average. This will benefit Alcon as people starts getting to know more of their products, which Alcon claims offer true swiss quality and are considerably better than other choices in the market. This may attract new customers who buy Alcon’s lenses for the first time and stay with Alcon, potentially increasing Alcon’s market share. On the other hand, if Alcon is the only one that doesn’t need to ship its products and therefore the only one that offers accesible prices at a given moment, many current customers from competitors could also become more and more attracted to trying Alcon’s products and, after testing them, may also decide to stay, which will help to the trend of increasing market share. Finally, Alcon will enjoy continuously much better margins on sales compared to their competitors. This may deter diversified competitors from staying in this market or to invest more (what is really needed initially to avoid those shipping costs). In my opinion, this shows Alcon is poised to win the entire market in the long run, unless competitors decide to invest heavily in it.
UBS has a price target on Alcon’s stock of 85 CHF or 91.73 USD. I personally think that this price target only considers past performance and is developed looking at the results of past fiscal quarters. I think they haven’t recognized this sector or industry as a reopening play and are therefore not incorporating that in the forecast for the company. They even think the valuation is highly stretched because of a PER of 200 (they are scared of that; which I was honestly in the beginning too). After looking at the financial results, anyone can realize the company is barely indebted (thanks to the spin off ; all the debt stayed at Novartis) and generates 15 Billion in revenue. The earnings are being mostly invested into R&D ( which is the best) and that explains the impressively high PER reading. Operating margins are also very low and have much room for improvement.
In my opinion, UBS’s rating and target price completely misses the fact that the company is a reopening play and will experience a huge improvement on results and increased sales as the economy reopens. This on top of the already 17% annual growth. I think UBS’s price target is, as a product of this fact or miss, extremely conservative. I could even say it is unrealistically conservative.
The fact that Alcon is a new company and lacks of financial result’s history and trajectory also helps in this equation that leads the analysts to not realize their mistakes in their low valuations. It also increases / adds uncertainty and fear among analysts that the company guidance on future earnings is not achievable, when in reality Alcon’s guidance is extremely conservative and logically achievable.
For all these reasons and calculations not included in this article, my 3- year price target for Alcon’s stock is 180 CHF or 194 USD.
The stock is now worth:
72.70 CHF
OR
78.59 $
As always, thanks for reading and have a nice weekend! :)
8 October 2021,
UNFLAGGED RESEARCH 🚩
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