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Convatec surges on strong Q3, raises guidance

Published 12/11/2024, 11:40
CTEC
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Investing.com -- Shares of Convatec (LON:CTEC) surged by 20% on Tuesday as the company posted strong organic revenue growth for the first ten months of 2024, surpassing its prior guidance. 

Convatec reported a 7.7% rise in organic revenue for the period ending October 30, outpacing its initial full-year target in the upper range of 5.0% to 7.0%. 

The results have led the company to boost its full-year 2024 guidance to a new range of 7.25% to 8.0% for organic revenue growth, with an adjusted operating profit margin now expected at or above 21.5%—an increase from the previous minimum of 21.0%. 

However, a 70-basis point headwind from foreign exchange rates may trim the reported margin.

The company reiterated expectations for double-digit growth in both earnings per share (EPS) and free cash flow to equity, a projection that stands ahead of the market consensus of 8% growth in adjusted EPS. 

In the first half of 2024, Convatec faced slower growth in EBIT margins and adjusted EPS, which had weighed on investor sentiment. Now, however, solid performance in the latter half of the year has eased concerns, particularly regarding potential reimbursement changes for its Advanced Wound Care products in the United States. 

The company confirmed that these adjustments should not affect FY25 group guidance, a relief to investors and another factor in the stock rally.

Convatec's Advanced Wound Care division saw strong demand in the U.S. for its ConvaFoam product, boosting the company’s overall growth in this segment to the high single digits, ahead of earlier projections. 

Sales of InnovaMatrix, a major component of the wound care segment, rose by 40%, contributing an extra 1.1% to the company’s organic sales growth. 

Despite trailing initial projections of $110 million in annual sales, InnovaMatrix is on track to generate about $100 million for FY24, with 25% of sales now in product areas unaffected by upcoming U.S. local coverage determinations (LCDs) – a slight increase from 20% in 2023. 

“We also view the strong growth InnovaMatrix in indications outside the scope of the LCD as positive, and we see its indications for growth and profitability indications for FY2025 as incrementally reassuring,” said analysts at RBC Capital Markets in a note.

Convatec is also progressing with two new clinical trials, expected to yield data by 2026, to support further growth in this area.

In other segments, the Ostomy Care division posted steady mid-single-digit growth, driven by strong performance in emerging markets and increased patient referrals to the North American Home Services Group. 

Similarly, the Continence Care division delivered high single-digit growth, with the U.S. Home Services Group continuing to expand its market share and add new patients. The company also anticipates an opportunity to grow margins when changes to catheter reimbursement codes take effect in 2026.

The Infusion Care segment also recorded high single-digit growth, largely due to rising adoption of durable insulin pumps and demand from new customers and therapies. 

Looking ahead to FY25, Convatec expects to achieve organic revenue growth of 5-7%, even excluding sales from InnovaMatrix, which is not affected by the draft LCDs. 

With analysts at Stifel projecting a consensus growth of 5.5%—and possibly factoring in some InnovaMatrix sales—Convatec’s outlook remains strong. 

The company anticipates further operating margin expansion to support double-digit adjusted EPS growth, aligning with its target of reaching a mid-20s operating margin by 2026 or 2027, a goal that Stifel projects at 23.9% by 2027.

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