Investeringskommentar, Debbie S. Wang, 27/08/2015
Coloplast's Near-Term Stumbles Offer Opportunity for Long-Term Investors Operational glitches and a legal overhang have hampered Coloplast's recent growth in the United Kingdom and United States, leading to the market's lack of conviction in the future growth trajectory and causing the share price to pull back; the shares now trade at a 16% discount to our fair value estimate. We believe the market does not fully appreciate management's responses to these issues or the strength of Coloplast's narrow economic moat, which should return the company to strong annual earnings growth of 14% over the next five years. Despite recent setbacks, Coloplast's moat remains secure, bolstered by high switching costs, efficient scale, cost advantage, and intellectual property.
Near-Term Setbacks Have Been Addressed
New operational accommodations should address the U.K.'s enforcement of new ordering procedures for ostomy and continence supplies, and we expect normalized growth rates to return by spring of 2016. Further, we anticipate Coloplast and the Department of Justice to reach a final agreement over marketing practices by early 2016, with an immaterial penalty of less than $10 million. More important, the termination of this investigation frees the company to resume marketing activity in the U.S.—a critical market where Coloplast remains underpenetrated.
Coloplast Has Dug a Moat in Appealing Markets Poised for Steady Growth
Coloplast is active in four market segments, three of which receive very little investor attention but offer opportunities for relatively consistent growth. We particularly like the ostomy, incontinence, and urology businesses, where there is a great need for innovation while the competitive landscape is relatively consolidated. We think this combination offers fertile ground for the creation of moats. Coloplast's narrow economic moat stems primarily from efficient scale, intellectual property, and brand loyalty, particularly in ostomy supplies. By focusing on differentiated product features along with a steady stream of technological innovations, Coloplast has been able to earn economic profits in markets that at first blush appear to be ripe for competition based on price and commodification.
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