Gathering New Information about Stocks, Health, and Sports

Introduction

Alcon (ACL) is a $48.41 billion company in the major drug industry. Market capitalization competitors in this industry include Bristol Myers Squibb, Merck, and Wyeth. The major drug industry is down 13.28% over the past year compared to the S&P 500 which is down 17.17% during the same period. Over the past month, the industry has been up 0.41%, while the S&P 500 has been down 8.33%. Strong technical trends may be indicative of a continued expansion in this industry. Evidence comes from a potential turnaround in general equities. Moreover, as there seems to be evidence of confidence in equities, major drug stocks like Alcon will see future benefits. Also Alcon’s growth and valuation illustrate the potential for a strong earnings report next quarter.

Business

This section describes what Alcon produces. According to Reuters, Alcon “is a research and development driven, global medical specialty company focused on eye care.” In simplest terms, the company develops products necessary to treat diseases and disorders of the eye. More specifically, the company divides its business into three different segments. These segments include pharmaceutical products, surgical products, and consumer products. These products are used to treat bacterial or viral issues of the eye. Through the various products, the pharmaceutical area tries to fight infection and inflammation in highly advanced ways. Moreover, Alcon’s second business segment, surgical products, follows a similar route. In this business segment, Alcon focuses on trying to correct the lens of the eye through surgical procedure. The last business segment, consumer products, is a bit less complicated. These types of products follow the contact lens liquid solution. In addition, there are other products used to help the lens of the eye with vitamins and other supplements.

Growth

Alcon has illustrated solid growth prospects over the past year. According to Reuters, Alcon reported a $5.59 billion revenue product last year. This number is up over 14.84% than it was the previous year. Compared to the industry’s average of 2.21%, investors see the relative strength compared to other competitors. This number is higher than the company’s five year average of 13.23%. Moreover competitor annual averages of 8.91% (Wyeth) and 5.46% (Merck) are lower than Alcon’s current figures. And given that Alcon’s five year average of 13.23% is higher than the industry’s five year average of 9.09%, this company has the potential to move even higher. Alcon’s earnings grew at a strong 27.96% last year—a number much higher than the industry average. Competitors such as Wyeth only saw a 5.16% increase and Merck saw a disappointing increase in earnings of 5.47%. Therefore, both earnings and revenue growth is strong for Alcon.

In addition, Alcon has kept its costs under control. According to Reuters, Alcon has reported gross, operating, and net profit margins of 75.10%, 34.06%, and 28.72% respectively over the past year. Moreover, these numbers are above the industry averages of 7.68%, 2.26%, and 1.50% respectively. The numbers are also above or near the company’s five year average respective numbers of 73.95%, 29.99%, and 24.04%. This comparison illustrates a history of strong cost controls and positively-related consistency. The current averages are also better (business model respected) than competitor Bistol’s respective operating and net income averages of 19.65%, and 14.24%. The same comparison can be made for Wyeth and Merck. Therefore, Alcon has proved to be a solid company in this industry. Its services are well-controlled cost wise, especially to direct market-cap competitors.

Compiling all this information together and investors comes across ROE. Over the past year, Alcon reported an ROE of 48.27%. Therefore, out of all shareholder equity, more than 48% (near five year average of 46.68%) come from earnings instead of debt or stock. This number is much stronger compared to the industry average of 5.95%, and the number is better than some competitor averages 19.46% (Bristol) and 26.58% (Wyeth). Therefore, Alcon has a history of strong earnings per its equity share—which reflects the strong capital gain movement over the past year. And if history is any indication, there should be no reason why Alcon cannot continue its success. The same logic applies to Alcon’s 25.55% ROA (above industry average) 40.02% ROI (above industry average).

Valuation

With fairly high growth estimates and historical data, there should be evidence of an overvalued company. However, this is not strictly the case. Alcon has a forward P/E ratio of 29.40 and a price to sales ratio of 8.35 compared to the industry’s respective 3.96 and 0.45, which shows a relatively overvalued status. In comparison, the rest of the market cap competitors have ratios that higher than Alcon. Bristol has a forward price to earnings ratio of 20.08 and price to sales ratio of 2.01. What makes Alcon’s figures are more enticing is these competing firms aren’t growing so greatly as strongly as Alcon. Alcon can now be seen as both a growing and valued company. Moreover, Alcon has a relatively low PEG (1.69) ratio compared to other competitors’ numbers as well.

Efficiency

Alcon is efficient. Inventory turnover at 2.67 is strong compared to other industry market-cap rivals (Wyeth: 2.18). Moreover, asset turnover is also strong at 0.89 compared to competitor figures. Receivables turnover were at 5.15, but cash is not an issue for Alcon. In terms of liquidation, Alcon current ratio is at 1.85. This number is a bit risky, but the company’s capital expenditures have increased (12.94%) which means further increases in capacity and economies of scale may be present in the future, because of this financing. Moreover, institutions own 92.48% of all Alcon shares. Since the institutional investors have a larger gross amount of capital to lose compared to the retail investor, a high institutional percentage illustrates confidence in the stock's ability. The dividend rate of 1.57% is also high.

Technical Analysis

Alcon performed great in the past year. The company’s share price has increased 20.01% year-to-year. This type of growth is beautiful for a recessionary-type economy, especially considering the fact that the housing market and construction is doing so poorly. There seems to be some support at the 135 dollar share price range dating back to late March 2008. The last time Alcon reached this amount the company rebounded and appreciated 23%. There is a possibility a similar or better situation could occur in the future.

More specific to the current month, Alcon illustrates strong technical signals. Parabolic SAR is below and upward trending the current share price. This event usually signals an upturn in share price. The company is a little undervalued compared to the RSI index at 43.12, but it is better to be an advocate of fundamental valuations before technical valuations. Therefore, while now isn't the most ideal time to purchase shares of Alcon according to technical analysis, purchasing shares will still produce strong long terms gains.

Conclusion

Alcon is a great acquisition for any portfolio. The company's business model and fundamental analysis are both strong. It is very rare to find a company that has both strong valuation and growth, so it is wise to take advantage of these situations as they arise.

-Dennis Biray
July 4th, 2008