Carl Zeiss: Lowered Guidance From Difficult Market Conditions Leads Shares to Tumble

Narrow-moat Carl Zeiss held an unexpected business update call June 17 where it discussed challenging market environments, slower-than-expected recovery of the equipment business, and a worse outlook for the remainder of the year. All these drivers led management to lower top- and bottom-line guidance. It now expects full-year sales to land around EUR 2 billion (previously EUR 2.1-EUR 2.15 billion) excluding contributions from the DORC acquisition, estimated around EUR 100 million during second half of fiscal 2024. While the revision in sales expectation, about a 7% reduction from the previous top end of the range, could have waited until third-quarter earnings call, we think it is the significantly lowered expectation of EBIT, which is now guided to sit in between EUR 215 and EUR 265 million instead of the previously stated target of about EUR 350 million, that led to the call; the midpoint of the new range (EUR 240 million) suggests over a 30% year-over-year decline. Company shares since the release of the news are down about 18% and are trading at the lowest level they have ever been during the last five years. After updating our model, we trim our fair value estimate to EUR 77 per share from EUR 82 and now believe that shares are trading in a favorable territory for the first time since we took a fresh look at the company in April 2023.