VGI Partners: Olympus Corporation

When you see the name “Olympus” you probably think of the iconic digital camera business. However, what is less well known is that Olympus was a pioneer in gastrointestinal endoscopes, which are long flexible tubes with a video camera used to screen for gastric and colorectal cancer. Olympus launched its first endoscope back in 1955 and has dominated the industry ever since. With a market share of around 70% today, endoscopes are the key driver of earnings for the business.

As with most medical technology devices, endoscopes require a significant amount of training for the doctors who use them. This leads to a high degree of loyalty, as a practitioner would have to retrain on a new control system if they were to change to another brand.

This is also a market with strong long-term growth. In developed countries, screening programs that use endoscopes are growing as the focus on preventative healthcare increases. In developing markets, the adoption of Western diets is increasing the prevalence of colorectal cancer, which in turn drives demand for endoscopes. China is a high-growth market for Olympus, while India has potential to become a significant market in coming years.

Olympus made headlines for a corporate corruption scandal in 2011; however, this is well and truly behind them and the company is now a corporate governance leader in Japan. They have quite recently appointed three foreign directors onto the board and have announced the divestiture of the loss-making digital camera business; these are both monumental changes for a Japanese company and we find them extremely encouraging. Last year management announced a value creation and transformation program with the aim of almost doubling the operating margin, which currently sits well below global peers.

We think Olympus is a very high-quality business, which is dominant in a highly consolidated and growing industry. There is tangible evidence to suggest management are intently focused on modernising the business and improving its efficiency. We think these factors will drive significant long-term earnings growth and attractive shareholder returns.

This information has been prepared and provided by VGI Partners. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.