Convatec Shares Surge 20% on Strong Revenue Growth and Upgraded Guidance for 2024

Shares of Convatec (LON: CNVVY) experienced a remarkable rise of 20% on Tuesday following the announcement of strong organic revenue growth for the first ten months of 2024, which significantly exceeded previous expectations. Specifically, the company reported a 7.7% increase in organic revenue through October 30, surpassing its earlier forecast that anticipated growth between 5.0% and 7.0%. This impressive performance prompted Convatec to enhance its full-year 2024 guidance, now estimating organic revenue growth between 7.25% and 8.0%, alongside an adjusted operating profit margin projected to be at least 21.5%, up from the earlier minimum of 21.0%. However, a 70-basis point headwind from foreign exchange fluctuations may dampen the reported margin slightly.

Moreover, Convatec has reiterated its forecast for double-digit growth in earnings per share (EPS) and free cash flow to equity, a figure that outpaces the market consensus which expects only 8% growth in adjusted EPS. While the initial half of 2024 saw subdued growth in EBIT margins and adjusted EPS, fears among investors have subsided due to resilient performance in the latter half of the year, especially regarding potential reimbursement adjustments for its Advanced Wound Care products in the U.S. Fortunately, the company confirmed that these anticipated changes should not impact overall guidance for FY25, much to the relief of investors and contributing to the stock's bullish trend.

Convatec has seen robust demand in the U.S. for its ConvaFoam product within its Advanced Wound Care division, leading to a high single-digit growth in this segment, surpassing earlier estimates. Notably, sales of InnovaMatrix—a critical component of the wound care segment—witnessed a staggering 40% increase, contributing an additional 1.1% to the company's organic sales growth. Although initial projections set an ambitious target of $110 million for annual sales, InnovaMatrix is poised to reach about $100 million for FY24, with approximately 25% of sales occurring in areas unaffected by impending U.S. local coverage determinations (LCDs), an improvement from 20% in 2023. Analysts from RBC Capital Markets view this growth as a positive signal, suggesting solid indications for profitability and expansion in FY2025.

Furthermore, Convatec is advancing two new clinical trials expected to deliver data by 2026, further bolstering its growth prospects in the wound care sector. When examining other business segments, the Ostomy Care division demonstrated consistent mid-single-digit growth, attributed to strong performance in emerging markets and increased patient referrals to the North American Home Services Group. The Continence Care division also excelled, achieving high single-digit growth, propelled by the expansion of the U.S. Home Services Group’s market share and patient base. The company foresees additional margin growth from adjustments to catheter reimbursement codes set to take effect in 2026. Similarly, the Infusion Care segment reported high single-digit growth, driven by the heightened adoption of durable insulin pumps alongside new customer demand.

Looking ahead to FY25, Convatec anticipates organic revenue growth ranging from 5% to 7%, excluding InnovaMatrix sales, which are insulated from potential draft LCD impacts. With analysts at Stifel predicting a consensus growth of approximately 5.5% (potentially including some InnovaMatrix sales), the outlook for Convatec remains bright. The company also aims for further operating margin enhancement, supporting double-digit adjusted EPS growth, and is targeting a mid-20s operating margin by 2026 or 2027, a goal that Stifel projects to reach 23.9% by 2027. Traders should keep a close eye on Convatec as it navigates the complexities of the healthcare market while demonstrating promising growth across various segments.