Alcon Inc. (ACL) reported third-quarter earnings of $1.84 per share, easily beating the Zacks Consensus Estimate of $1.75 and 7.6% ahead of the year-ago figure. Earnings were boosted by strong revenues.
Revenues
Quarterly revenues of Alcon increased 9% to $1.76 billion (including the impact of foreign exchange), ahead of the Zacks Consensus Estimate of $1.70 billion. While strong contributions from the Systane family of products, continued gains in the glaucoma market and increased sales attributable to a severe otic season boosted US revenues by 9.5%, international revenues grew 8.6%. Emerging markets recorded a 20.2% increase with BRIC nations (Brazil, Russia, India and China) reporting a growth of 25.6%.
We were pleased to see that all the revenue segments at Alcon put in strong performances in the reported quarter. While pharmaceutical sales climbed 15% to $758 million, surgical sales increased 3.8% to $767 million. Consumer sales jumped 8.8% to $235 million.
Pharmaceutical revenue benefited from an increase in the sale of otic products (up 29.2% to $137 million) in the US complemented by strong performance by the glaucoma franchise, sales of which increased 10.5% to $316 million. Continued market penetration of Azarga outside the US, and robust sales of DuoTrav boosted the performance of the glaucoma franchise.
Strong global performance of the Systane family of products helped drive Consumer revenue during the quarter to $235 million.
Alcon’s third-quarter gross margin increased 70 basis points (bps) to 76.0% from the year-ago margin of 75.3%, mainly due to foreign exchange rates fluctuation.
Quarterly operating margin was 35.7%, 870 basis points above the year-ago figure. The increase was primarily due to strong sales growth, positive price contribution as well as the favorable, though temporary, impact of foreign exchange on gross profit margin.
Improved Outlook for 2010
Alcon raised its guidance for fiscal 2010 and now expects earnings per share in the range of $7.58 to $7.68 (from $7.45 to $7.62) on organic sales growth in the high single digits. US healthcare reform is expected to negatively impact fiscal 2010 revenues by $20 million and earnings by 6 cents a share.
The guidance excludes the impact of the costs the company expects to incur due to a change in the majority ownership to Novartis AG(NVS).
The Zacks Consensus Estimate for fiscal 2010 currently stands at $7.63 per share.
Our View
We currently have a Neutral recommendation on Alcon, which is supported by a Zacks #3 Rank (short-term Hold rating). We believe the company’s business model remains fundamentally strong. Alcon has also done an excellent job with cost-control, which should continue to benefit operating margins. Meanwhile, sustained international penetration, new product launches and market share gains will likely fuel future revenue growth.
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