Coloplast Earnings: Strong Demand Drives Revenue, Though Foreign Exchange and

Though foreign-exchange headwinds have nagged at Coloplast COLO B, underlying demand remains robust and revenue growth remains on track to meet our full-year projections. We’re holding steady on our assumptions and leaving our fair value estimate for the Danish shares unchanged. However, we’re raising our ADR fair value estimate to $14.10 from $13.30 to reflect current foreign-exchange rates. Importantly, we have upgraded our economic moat rating to wide from narrow on the strength of Coloplast’s returns and consistent ability to deliver innovation that drives returns on invested capital far above its cost of capital. Having studied Coloplast for over a decade now, we think it can maintain its intangible assets and switching costs to generate economic profits over the 20-year period that characterizes a wide economic moat. For this firm, it comes down to a particular focus on end users and ability to introduce meaningful design improvements, even after patents expire.

Revenue gains looked strong in the fiscal third quarter. Year-over-year quarterly organic growth from ostomy, continence care, and voice/respiratory was on the high side at 8%, 9%, and 9%, respectively, driven by the other developed markets segment, which is heavily influenced by the United States. Additionally, resumption of procedure volume in China led to quarterly double-digit growth in ostomy and woundcare in that market. In contrast to top-line results, profitability remained under pressure. In particular, higher input costs, freight, intense wage inflation in Hungary, and startup costs associated with the new Costa Rica facilities were only partially offset by the addition of voice/respiratory and efficiency initiatives. We expect inflation to slow for Coloplast in the next fiscal year and estimate a return to a 30% operating margin in the 2024-25 fiscal year.