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Investing.com -- Carl Zeiss Meditec AG on Tuesday received an upgrade from Goldman Sachs, reflecting a shift in sentiment toward a more optimistic outlook for the company’s financial trajectory.
Shares of the German optical systems and optoelectronics manufacturer were up 5.9% at 08:27 ET (12:27 GMT)
Goldman Sachs has revised its stance to “buy” from “neutral,” setting a new price target of €74, up from €59, signaling a 27% upside from the last close at €58.35.
This upgrade is underpinned by signs of stabilization in the China Refractive segment and expectations for improved earnings performance in the coming fiscal years.
One of the primary drivers behind this upgrade is the reassessment of China Refractive, a segment that had previously been a major factor in consensus downgrades.
Over the past 12 months, the company’s earnings expectations had suffered due to a slowdown in procedure volumes and increasing price sensitivity in the Chinese market.
However, Goldman Sachs analysts now believe that the market has been overly pessimistic in forecasting a significant double-digit decline in China Refractive for FY25.
Instead, their latest analysis suggests that the business is stabilizing, as evidenced by key developments including management’s positive signals during the Q1 FY25 earnings call, the approval of Visumax 800 in China, and findings from Goldman Sachs’ Medtech & Tools trip to China.
The Visumax 800, which received regulatory approval in China in February, is expected to play a crucial role in reviving equipment sales in the second half of FY25.
Goldman Sachs analysts anticipate that the new device will drive better revenue from China, given its expected 20% price uplift compared to existing products.
Equipment sales had been materially down in FY24 due to broader macroeconomic challenges and delays in the product cycle, but as hospital capital expenditures improve and Visumax 800 is rolled out, the firm sees a stronger recovery ahead.
On the financial side, Goldman Sachs has made modest upward revisions to its estimates for Carl Zeiss Meditec. EBITA forecasts have been raised by 0-3% for FY25-27, driven by higher expected revenues from the Optical Devices Technology division, particularly from China Refractive.
The new estimates put the company’s FY25 EBITA at €288 million, which is 9% ahead of Visible Alpha Consensus Data. The firm now projects Carl Zeiss to trade at 25x and 21x 12/24-month forward P/E, reinforcing the case for its “buy” recommendation.
Further supporting this upgrade, Goldman Sachs expects a stronger-than-consensus performance in the upcoming Q2 FY25 results. The firm forecasts EBITA of €64 million for the quarter, compared to the consensus estimate of €56 million. This optimism is rooted in expectations of a recovery in procedure volumes, improved pricing dynamics, and continued momentum from new product launches.
Moreover, Goldman Sachs sees additional upside potential in H2 FY25, with a projected 8% organic growth rate fueled by the rollout of Visumax 800 and KINEVO 900.
From a valuation perspective, Carl Zeiss shares are currently trading at 25x next-twelve-month (NTM) P/E and 21x 24-month-forward P/E, based on Goldman Sachs’ estimates.
This valuation is deemed undemanding given the improving visibility on China Refractive, the potential for earnings upgrades, and the company’s anticipated return to organic growth over the next 18 months.
Over the past year, the stock has declined by 45%, primarily due to earnings downgrades and multiple compression.
However, Goldman Sachs said that historical valuation levels suggest significant upside potential, particularly if consensus estimates adjust to reflect the improved outlook.