ACL Pipeline Better in Long-Term

Alcon Inc. (ACL - Analyst Report) continues to post solid growth despite being faced with several issues including patent challenges and expirations as well as pipeline setbacks. The lofty valuation the shares trade at likely leaves little room for significant appreciation in the near term. We like the stock as a long-term holding and rate the shares a Hold.

All three major businesses lines at Alcon should continue to generate strong top-line growth. Impressive performance from all major business lines along with seemingly sustainable high single-digit sales growth and controllable expenses for the foreseeable future adds up to a strong set of fundamentals. Tax incentives will additionally benefit EPS.

Continued international penetration and market share gains will be the fuel for future growth at Alcon. Sales in emerging markets, including China, Russia and India continue to be big contributors to growth. The company generates a significant amount of operating cash flow, which we would expect to be reinvested in the form of acquisitions or increased research and development in an effort to restock the company’s drug portfolio following certain patent expirations.

We expect earnings per share (EPS) to grow by an average of about 13 percent over the next four years. For 2008, we expect EPS to grow 19 percent on revenue growth of 16 percent. While the shares remain pricey at 25.2x our 2008 EPS estimate of $6.42, we feel Alcon has the wherewithal to deliver on its expectations. Management has done an excellent job in continuing the growth of its existing product line through market share gains and line extensions. Our price target is $175, representing 27.3x our 2008 EPS estimate of $6.42.

Jason Napodano, CFA, contributed to this report.

Read the full analyst report on ACL