Alcon

Alcon delivered 9% and 10% revenue and core EPS growth, respectively, during the second quarter. Both figures landed ahead of FactSet consensus. Guidance for operating margin and EPS was raised by 200 basis points. Shares traded up 2%.

Why it matters: The continued uptick of the Unity lineup impresses us, as the equipment segment (up over 25% year over year) clocked another fantastic quarter. Even though we expect the back half of the year to see a much more muted performance as tougher comparisons kick in (Unity CS launched during the second quarter of 2025), we have been impressed with Alcon's commercial execution so far. The contact lens segment rose 5%, broadly in line with key peers during the quarter, and the US outperformed international markets thanks to pricing actions that made up 80% of the quarter's growth. Volume still looks soft for the first half of the year relative to historical levels, and we think the trend is likely to continue through the end of 2026 as a soft consumer environment weighs on the industry. We continue to expect operating expenses to remain elevated in the near term, as Alcon invests in the pipeline and initiatives for new launches. But this is not a concern to us given the firm's proven track record of similar investments paying off in strong commercial activities, such as the current Unity performance.

The bottom line: We are lowering our fair value estimate to $77/CHF 62 per share from $86/CHF 66 for narrow-moat Alcon to reflect our updated WACC, which was lifted to 8.1% from 7.3% to account for our increased beta assumption. Our view on the fundamentals of the business remains unchanged. Shares look fairly valued. The improved outlook mostly reflects the tariff refunds of $60 million rather than an updated view on the underlying business. Our 2026 estimates fall around the midpoint of the range, which expects core operating margin to be up 90 basis points-190 basis points and EPS up 12%-15%.

We are lowering our fair value estimate to $77/CHF 62 per share for narrow-moat Alcon from $86/CHF 66 to reflect our updated WACC, which was lifted to 8.1% from 7.3% to account for our increased beta assumptions. Our view on the fundamentals of the business remains unchanged.

We forecast mid-single-digit long-term growth for the visioncare segment driven by an aging population, an increasing prevalence of myopia, and a favorable product mix. Since roughly three-fourths of contact lens wearers are 25 and older, an aging population should help expand Alcon’s end markets. Studies have suggested that roughly 30%-40% the population is myopic today, but this number is expected to rise to 50% by 2050, and we expect the contact lens market to grow accordingly. We believe a trend to a more favorable product mix will fuel the company’s margin expansion. The industry has seen an increasing portion of contact wearers upgrade their lenses based on modality, lens material, and lens type, from reusable and monofocal to daily and specialty. We have seen an increasing number of wearers choosing daily lenses over reusable lenses, a trend that we believe will continue over the next five years.

We forecast mid-single-digit long-term growth for the surgical segment driven by factors including an aging population and increasing life expectancy. Surgical equipment has an average lifecycle of 10 years, and the company has followed this schedule to time its product launches. Alcon’s latest phacoemulsification machine, Centurion, was launched in 2013; it replaced Infiniti, which was launched in 2003. Its Unity platform serves as the latest example and was launched in 2025. As the new machine gradually rolls out and replaces older machines (Alcon stopped servicing Infiniti at the end of 2022), we forecast a slight uptick in revenue growth for the segment but expect that this is a short-term driver. We also expect Alcon to benefit from an increasing penetration rate for advanced technology IOLs because these have higher price tags and margins. The ATIOL penetration rate has doubled over the last 10 years in the US, from 10% to 20%, and we believe Alcon has some of the best ATIOLs on the market, especially thanks to recent launches of PanOptix and Vivity. IOLs have a materially higher margin than surgical equipment and consumables, and we model higher sales growth for them over other surgical businesses, so we expect this favorable product mix to help with margin expansion for the segment.

During 2025 Capital Markets Day, Alcon introduced a new long-term sales growth target of 6%-8% and core EPS growth target of 12%-15%, both in constant currency. While our five-year CAGR sales growth assumption of 6% is in line with this, our EPS projection suggests about a 10% five-year CAGR. For our numbers to meet the EPS target, we would need to model higher share buybacks, which we think Alcon could comfortably afford given its strong cash flow generation, but more importantly, a significant margin expansion, which we haven’t yet fully modeled in. Our core EBIT margin assumption of 24% by the end of our five-year forecast model suggests over a 350-basis-point improvement from the midpoint of the 2025 guidance range. And even with moderate share repurchases already modeled in, we think margins need to reach over 27% for the EPS growth rate over the next five years to reach the midpoint of the long-term target. We are encouraged to see continued innovation and bolt-on acquisitions that bolster Alcon’s portfolio across the business, but we still need to see more from the firm before we can be fully convinced on this EPS growth target.

We assign Alcon a narrow moat rating because we believe its strong brand recognition and technically advanced products (intangibles) and the low likelihood of doctors and patients moving to a different product (switching costs) should continue to support economic profits for at least the next 10 years.

We believe Alcon’s contact lens business benefits from intangible assets due to superior products, continued investment, and brand power. The firm spends roughly 9% of sales on research and development and continues to release superior products that are innovative and first to market. In our opinion, it takes intensive R&D as well as technical know-how to develop and manufacture premium contact lenses, and this is difficult to replicate. We also believe Alcon bolsters brand power through an evolutionary compounding of clinical and technical improvements in its products. The company fosters practitioner preference with scientific evidence proved by clinical studies often spanning years. All of this effort by Alcon reinforces a positive perception with its practitioner base and would require a lot of effort from a competitor to dismantle and convince otherwise.

We also assign switching costs to Alcon’s contact lens business. In the US, a patient must get a prescription from an eyecare professional to purchase contact lenses, and each prescription is brand-specific. Most eyecare professionals stick with just one or two brands because they have strong relationships with manufacturers due to brand loyalty and rebates. They are also unlikely to mix brands because they want to prescribe products that they are familiar with. For patients, each contact lens fits differently, and material behavior is different with all soft lenses, so once someone finds contact lenses that they enjoy wearing without any issues, it is highly likely that they will stick with the same ones year over year. On average, a patient sticks with the same contact lenses for seven years. Once customers are comfortable with a product, they are unlikely to switch lenses unless they are trading up to a superior product (for example, switching from monofocal to multifocal or toric).

The implantables business is made up of intraocular lenses that tackle various vision-correcting needs. An IOL is an artificial lens that replaces the natural eye lens removed during cataract surgery. Alcon is a global leader in IOLs and controls 40%-50% of the market, by our estimate. Unlike contact lenses, which patients can try for themselves and pick a preferred option, doctors decide which intraocular lenses are the most suitable for each case. It is vital for doctors to be fully comfortable with lenses they use, because a misplaced lens can cause blurred or double vision, swelling, or bleeding, which requires extra surgeries to correct. We believe that doctors who have had success with Alcon’s IOLs would be reluctant to switch to another product and risk poor patient outcomes after surgery. We see this in action in multiple ophthalmology forums, journals, and newspapers where doctors discuss their preferred IOLs as well as their level of comfort.

During a surgical process, doctors need many handpiece consumables on hand, and the handpieces can have different lengths and sizes, with various tip angles. In addition to hand tools, surgeons use single-use tubing for fluidics attached to the surgical equipment. The use of Alcon equipment often requires using Alcon-manufactured instruments, as third-party instruments aren’t compatible. In fact, 40% of segment sales come from items that are solely compatible with Alcon machines. We think these proprietary consumables have very high switching costs because customers can’t substitute Alcon’s products with those of competitors. Doctors often choose to purchase their full line of consumables from Alcon, which includes nonproprietary products, and many take advantage of the option to purchase an Alcon Custom Pak with the full set of tools needed for a specific procedure.

Equipment/other comprises surgical equipment used to treat cataracts, refractive errors, retinal diseases, and glaucoma, as well as training, services, and technical support for these machines. Alcon has the top market position in phacoemulsification (70% in the US and 50% global), the most common procedure used to remove the natural lens during cataract surgery. In the US, over 95% of cataract removal is performed by phacoemulsification. With over 30,000 active consoles, Alcon has the largest installed base of phacoemulsification and vitreoretinal machines in the world. We think the inherent technical complexity of ophthalmic equipment, the lengthy approval process to bring this type of equipment to market, and the importance of surgeon familiarity are all factors that give Alcon’s equipment business a moat from intangible assets.

Alcon is one of the leading visioncare companies in the world, with a record of successful product development, and it will continue to launch technically superior products that should lead to market outperformance.

With lines like Total1 and Precision1/7, Alcon has some of the best daily and reusable contact lenses in the market, and it continues to see growth from both new wearers and upgrades from existing wearers.

Favorable global trends such as an increasing prevalence of myopia, an aging population, and growing economies in emerging markets will expand Alcon’s end markets.

A misstep in commercial execution for new product launches could hinder Alcon's market position and weigh down future growth rates across business units.

Bausch & Lomb and Carl Zeiss Meditec are poised to significantly expand their presence in the US, a market that has traditionally been a source of strength for Alcon, and the additional competitive threats could be challenging to overcome.

While Alcon's contact lens market share has been stable, lagging research and innovation could start to chip away at this.