Sunday, January 20, 2019

Alcon, Part III: Financial Analysis, Risks, Catalysts

Financial Analysis
Luckily, Alcon’s financials are pretty straight forward. To analyze, it’s best to compare Alcon’s present condition with the “old Alcon.”

To start, let’s look at factors surrounding working capital. Working capital turnover presently is faster than it was at Alcon 2010 and before (3x vs. 2x). This shows that over time, the company has improved on its working capital management and is more efficient today. In contrast, Fixed asset turnover is much slower in the present Alcon than at old Alcon (2-3x vs. 5x). This is due to the fact that Alcon produces much less revenue than it did in the past. The number should increase in the future as the company turns around. Inventory turnover is slightly faster in recent years than it was in 2010 and before (3x vs. 2.5x). Although, if looking at inventory compared to sales, the number has risen from 2010, but stayed constant, at around 0.18 vs. 0.1. This is again due to the fact that sales have been depressed after Alcon was acquired by Novartis. Alcon’s receivables turnover is roughly the same as it was in the past (5-6x), as is the payables turnover (6-7x).

Alcon’s current ratio is much more stable (and higher) now than it was in the past (3.5x vs. 1.5-3x). Its cash ratio, on the other hand, is much smaller now than was before (0.2x vs. 1.2-1.4x). Comparing cash to debt, the ratios were 1.15x (2017), 0.65x (2016), and 1x (2015) compared to 7.49x (2010), 4.54x (2009), and 2.18 (2008). In the absolute sense, Alcon’s cash on balance sheet has significantly decreased from $1B to around $170M. Debt to equity is roughly zero as is LT debt to equity in the present Alcon. In 2010 and before, it was roughly 10-50% (decreasing over time), and 1%, respectively.

Alcon’s debt situation will change with the spin-off, however. The company plans to incur $3.5B in debt financing from Novartis, resulting in a debt/equity ratio of 0.15. At Sept. 30th 2018, Alcon had cash of $172M, current financial debt of $115M, and non-current financial debt of $87M. Interest expenses are expected to be between $140 and $160M per year.

How well does the company cover interest now (the little it has currently)? By operating cash flows, interest is covered 94x (2017), 59x (2016), and 91x (2015). By free cash flow, interest is covered 62x (2017), 38x (2016), and 62x (2015). With the extra debt financing it will incur, interest coverage by FCF will drop to roughly 4x and by OCF, approx. 8x.

The company is highly cash flow generative. It produces free cash flow of $803 (2017), $801 (2016), and $924 (2015). The old Alcon produced much higher free cash flow, but as the company recovers, it may return to these levels: $2,066 (2010), $2,074 (2009), and $1,730 (2008). In terms of the investment trend, the new Alcon’s capital expenditures are much higher than its depreciation, mirroring the healthy trend at the old Alcon.

1.     Major competitors in contact lenses offer competitive products, plus a variety of other eye care products including ophthalmic pharmaceuticals, which may give them a competitive advantage in marketing their lenses.
2.     Vision care competes with eye glass manufacturers and providers of other forms of vision correction including ophthalmic surgery
3.     Contact lenses market characterized by declining sales volumes for reusable product lines and growing demand for daily lenses and advanced materials lenses
1.     Alcon expects cannibalization of reusable contact lens sales
4.     Voluntary market withdrawal of CyPass micro-stent glaucoma product (Aug. 2018) will have adverse impact on business ($337M impairment charge)
5.     Pricing pressure from government and insurance programs
1.     Physicians, eye care professionals, and other healthcare providers may be reluctant to purchase our surgical products if they do not receive adequate reimbursement
  1. Alcon surgical experiencing slight decline due to competitive pressures on IOLs
  2. Vision care, private label growth and retailer branded lenses may drive the commoditization of contact lenses and further boost the bargaining power of our distributors and retailers

1.     $5B in share buybacks
2.     margin expansion due to cutting amortization expense
3.     progression of innovations as mentioned in previous sections