Lonza Earnings: Trims Near-Term Outlook on Slower Growth; Shares Undervalued for Long-Term Investors

Lonza LONN trimmed its 2023 outlook to mid- to high-single-digit sales growth (from high single digits) and 28%-29% core EBITDA margin, due to slower growth in early-stage services and a decrease in demand for nutraceutical capsules. The reduction of core EBITDA margin reflected a 6.5% decrease from the midpoint of management’s previously issued guidance. Investors reacted negatively and sent shares down 11%.

Revenue in the first half of the year exceeded CHF 3 billion, representing a 3% increase from the prior-year period. Lonza’s results were largely in line with our expectations, and we maintain our fair value estimate of CHF 620 per share. The stock is currently trading at a 21% discount to our fair value estimate, representing an attractive entry point for long-term investors. We maintain our narrow economic moat rating and stable moat trend. We continue to believe the long-term outlook for Lonza looks bright as drug manufacturing becomes more complex, with biologics and cell and gene therapies playing larger roles in the overall mix.

We forecast 2023 revenue to reach nearly CHF 6.7 billion, representing about 7% growth over 2022, and we expect the continued reduction of COVID-19-related sales. Excluding COVID sales and one-time effects, Lonza delivered underlying sales growth of about 10% at constant exchange rates during the first half of 2023. In the medium term, we model strong revenue growth in the midteens for Lonza’s biologics and cell and gene segments, and we forecast high-single-digit growth in the small molecules business.

During the quarter, Lonza entered a strategic collaboration with narrow-moat Vertex Pharmaceuticals to manufacture Vertex’s Type 1 diabetes cell therapies that are progressing in clinical development. We appreciate that Lonza is investing in capabilities to produce novel cell and gene therapeutics in addition to biologics, which will help drive growth. Lonza remains on track to spend 30% of sales on capital expenditure in 2023.