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Investing.com -- Goldman Sachs has upgraded Carl Zeiss Meditec AG (ETR:AFXG) to ’neutral’ from its previous ’sell’ rating, signaling a shift in outlook for the German medical technology company.
This change follows a period of underperformance in 2024, attributed to weaker-than-expected earnings, revised consensus estimates, and compressed valuation multiples.
One of the primary factors behind Carl Zeiss Meditec’s struggles has been a slowdown in its China Refractive business, which had previously been a key driver of growth.
The business suffered from a weaker macroeconomic environment and increased consumer downtrading, leading to a sharper-than-anticipated decline in revenue.
Given the high gross margin associated with refractive treatment packs, the downturn in China had a disproportionate impact on the company’s EBIT margins for the fiscal year 2024.
Additionally, its Microsurgery division faced challenges, particularly in the second half of the year, compounding the company’s difficulties.
Analysts at Goldman Sachs now believe expectations for the company have reached their lowest point. While visibility remains limited, the brokerage does not expect the China Refractive business to return to its previous levels of growth from 2016 to 2023, when its SMILE procedure was gaining traction.
However, Goldman Sachs no longer sees further downside risk to consensus estimates, particularly following the earlier-than-expected approval of Visumax 800 in China.
This regulatory approval is seen as a potential stabilizing factor that could help mitigate declines in the company’s refractive business.
As a result of these developments, Goldman Sachs has raised its earnings estimates modestly, attributing the improvement to foreign exchange movements and the Visumax 800 approval.
The brokerage’s adjusted EBIT forecasts for fiscal years 2025, 2026, and 2027 have been increased by 1-3%, positioning them slightly ahead of Visible Alpha consensus data.
With these adjustments, the brokerage has lifted its 12-month price target for Carl Zeiss Meditec to €60 from €50.
The upgrade reflects Goldman Sachs’ assessment that Carl Zeiss Meditec’s downgrade cycle is likely over, with shares having already fallen around 40% since the stock was placed on the ’sell’ list in May 2024.
By comparison, the FTSE World Europe index rose 2% over the same period, while the European MedTech sector gained 3%.
Despite this upgrade, uncertainties remain, particularly regarding the pace of recovery in China and the overall market conditions for refractive procedures.
Goldman Sachs continues to monitor these risks but sees the current valuation as more balanced, justifying the decision to remove the stock from its ’sell’ recommendation.
The upgrade indicates that while Carl Zeiss Meditec may not decline further, it also lacks strong near-term drivers for significant growth. Investors will likely await signs of market stabilization in China and successful cost-cutting initiatives before considering a more optimistic outlook.