Denmark-based Coloplast (OCSE:COLO B) develops, manufactures and markets medical devices and services to “make life easier for people for intimate healthcare needs.”
The company is a global leader in its niches, with a leading position in ostomy care (for people who live with a stoma) and continence care (for bladder or bowel management). These two product lines constitute the Chronic Care segment at Coloplast, which accounted for more than three-quarters of total sales as of fiscal 2018 and 2019. The company is also a major player in wound care for difficult-to-heal wounds and interventional urology for dysfunctional urinary and reproductive systems.
By geography, European markets represent nearly 60% of company revenue, followed by other developed markets (24%) and emerging markets (17%).
Coloplast was founded in 1957 by Aage Louis-Hansen. His son Niels Peter Louis-Hansen, currently Deputy Chairman, owns 20% of the company and controls 41% of the voting rights. In general, we at Urbem think that a family-influenced business tends to focus more on long-term sustainability, operate more conservatively and allocate capital more skillfully, which can lead to an outperformance of its return on capital, profitability and cash generation.
The management estimates an average customer lifetime of 10 and 30 years for the company’s main products, the stoma bag and catheter, respectively. As 90% of the sales here are reimbursed, the business is strongly non-cyclicality. As indicated in the chart below, neither the revenue nor the operating income at Coloplast was negatively impacted by the 2008 recession.
Thanks to the high switching cost, superior products and loyal user base, we expect Coloplast’s sales to be predictable. Meanwhile, the company leverages its scale to achieve a cost advantage and employs a consumer-centric approach to gain mindshare.
We also think the economic moat of Coloplast is further widened through patent protection. As displayed below, the business generated a consistently high return on assets over the last decade, outperforming peers ConvaTec (LSE:CTEC, Financial) and Becton Dickinson (BDX, Financial).
In a typical year, Coloplast invests up to 2% of its revenue to fuel long-term growth and widen its moat. That is nearly 10% of its earnings or free cash flow, which does not look like a generous number, but the rate of return appears attractive. The asset turnover has risen steadily since 2013, from 1.19 times to 1.46 times at the end of fiscal 2018 and 2019
Meanwhile, margins have been high, over 65% at the gross level and over 30% at the operating level. The top-line increased between 7% and 9% every year organically, which was also the target set by the management’s growth strategy. Investment projects generally involve the expansion of sales force, marketing, new regions and research and development.
Moving forward, management believes that the addressable market will grow at a rate of 4-5% per year, driven by a favorable demographic trend and expanding healthcare coverage in emerging markets, offset by advancement in surgical and medical technologies and healthcare reforms.
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the stock market. We do not own any security mentioned in the article.
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