A closer look at Alcon
I'm wrapping up my series looking at the six new stock positions my college buddy Bill Ackman initiated for his firm, Pershing Square (PS), during the second quarter.
On Friday and Monday, I took a "first glance" at each of them and shared excerpts from Bill's latest shareholder letter.
Then, on Tuesday and yesterday, I took a closer look at two of the stocks – S&P Global (SPGI) and Intercontinental Exchange (ICE), respectively. And I concluded both are far-above-average businesses trading at market multiples.
Today, let's take a closer look at the last of Bill's new positions – Alcon (ALC)...
It's a Swiss-American pharmaceutical and medical-device company spun out of Novartis (NVS) in April 2019. Alcon specializes in eye care, with a dominant position in the vision surgery market, and is the world's largest ophthalmology company.
As Bill concluded in his letter:
We anticipate Alcon can generate meaningful compounded returns from current levels as it grows earnings at a mid-teens rate and its valuation multiple expands to a level more reflective of its underlying business quality and long-term growth prospects.
As always, whenever I review a company's historical financials and valuation, I like to start with revenue and operating income. Both metrics were flat or down from 2015 through 2020, but have risen nicely since then:
Alcon's margins improved in 2021 thanks to the elective-procedure recovery after COVID, strong sales of advanced-technology intraocular lenses, and cost reductions following its complete separation from Novartis:
Yet the company's 12.9% operating margin over the past 12 months is well below what I would expect from a high-quality business like Alcon. This lends credence to Bill's thesis that there's ample room for margin expansion.
If we zoom in by looking at margins by quarter since 2021, we can see a modest uptick in the past year, which is a good sign:
Free cash flow ("FCF") steadily declined from 2015 through 2022, but it has rallied strongly since then:
Alcon has primarily used its FCF for acquisitions, most notably two each in 2022 and 2025:
The acquisitions have left little room for dividends (Alcon currently pays 0.5%). Same with share repurchases, though the company has started ramping them up in the past year:
Alcon assumed $3.5 billion of debt when it was spun out of Novartis. Its debt has remained steady since then, but this isn't a concern in light of its $1.7 billion in FCF in the past 12 months:
Overall, Alcon's historical financials are strong, with decent growth in revenues, earnings, margins, and FCF in recent years.
But it's not off-the-charts, world-class strong like Bill's other five new ideas. Those companies simply have to maintain their current economics for their stocks to be big winners, whereas Alcon will have to show improvement.
With this in mind, let's take a look at Alcon's valuation since 2019...
It has traded at an average of 31 times forward price to earnings (P/E). But in the past year, it traded down to a low of 17.3 times. And it has only slightly recovered today to 21.2 times consensus analysts' estimates for this year and 18.7 times next year's:
Interestingly, as Alcon's business has improved in the past year, its multiple has contracted sharply. A well-above-average business is now trading for a modestly below-market multiple.
This, combined with the potential to expand margins further, is the kind of setup I like...
My team and I at Stansberry's Investment Advisory will take a deeper dive. If we decide to recommend it as our best stock idea in an upcoming monthly issue, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.
P.P.S. On a personal note, Bill posted on X yesterday about his 26-year-old daughter Lucy's catastrophic brain hemorrhage in February, her long journey toward recovery, and his and his wife's nearly $1 billion donation to create an institute to help patients like Lucy. Here's the video of her leaving the hospital recently after six months.
Lucy and my middle daughter, Emily, are the same age. Bill and I spent many happy days taking them to playgrounds in Central Park, going to Disney World, etc. So it has been especially heartbreaking for me and my family to see what happened to her. Here are my favorite pictures of them growing up:
