On the Way to the Optometrist

By Dr. Duru written for One-Twenty

October 9, 2006

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A funny thing happened on the way to the optometrist - I could not see it. OK, that is not my real excuse for delaying a long overdue visit, but it seems more and more of you out there are like me and are visiting your eye care specialists less and less. At least that is what the stocks of various eye care companies are telling me.

First, the semi-good news. I have been tracking the drama surrounding Bausch & Lomb (BOL) for much of this year. My last piece on BOL suggested the stock was oversold. The stock is now up 14% from there and has been up as much as 19%. But overall, the stock is still far below it's all-time high, and the company is still struggling to overcome the problems that have beset its operations. On Sept 29, the NYSE decided to be so kind as to grant BOL a three month extension on filing its 10-K so that it can avoid delisting for now. I continue to like BOL's chances to eventually triumph, and I am just looking for another attractive entry point to get back into this recovery story. (See disclaimer here). The stock may have just successfully tested the 50DMA as support, so the time could be now.

I have followed the story of Cooper Companies (COO) far longer than BOL. I never understood why investors were willing to pay such a high price for this company. The stock's peak of glory came in early 2005 at around a cool $83/share. After a merger or two and a few earnings disappointments, the stock is now 36% lower and was selling for as little as $41.85 this summer. I suspect the acquisitions were a desparate attempt to demonstrate to analysts that the company could still grow at a healthy clip. Unfortunately, the buying spree was a classic warning sign that the core business was in danger. COO's latest (headline) earnings report in September gave me no indication that it can grow fast enough to justify the current valuation. However, analysts at Piper Jaffray and Citigroup saved the day with upgrades and/or increased price targets. Piper Jaffray in particular feels that the bottom has finally arrived ("Cooper Cos. Up on Analyst Upgrade", September 8, 2006, AP). I will have to leave you to study the situation for yourself, but the technicals are looking up and suggesting a continued recovery could indeed be around the corner. See the chart below.

Cooper Companies

Advanced Medical Optics (EYE) first came across my radar when I was researching the drama with BOL. One of EYE's many products is a contact lens solution that competes with BOL's offerings. At the peak of BOL's pain, EYE's stock was hitting new all-time highs. In fact, ever since the IPO in the summer of 2002, EYE's stock has practically gone straight up. Last month, EYE ran into what looks like its first (or most) serious challenge to date. On September 25th, EYE warned that earnings and revenue would not quite meet expectations. Specifically: "The company attributed the reduction in guidance to a slower-than-expected shift in its sales mix to premium-priced products, which is expected to cause gross profit margins to be below the previously targeted range. This change in timing with respect to the company's shift in 2006 sales mix is due primarily to: 1) Slower adoption of refractive implants by surgeons outside the United States...2) Softer-than-expected domestic laser vision correction (LVC) procedure volumes, and 3) Government reimbursement pressures in Japan and parts of Europe, as well as recent strikes by European surgeons who use the company's cataract products." In other words, demand is slowing (or not materializing) for some important products. Three analysts were swift to bail with ratings cuts, and the market readily agreed with a 16% pounding of the stock. Morgan Stanley finally came around last Friday. EYE looks like a very broken stock. Its good times may finally be at an end. At a forward P/E of 16, I cannot say it is a bargain now. However, I do note that shorts are all over this one...to the tune of 21% of the float as of September 12. Although the stock could bounce back to resistance (around $46 - a close of the gap and back to the 200DMA), the writing is probably on the wall here.

As if EYE was not enough, Lca-vision (LCAV), the makers of the famous LasikPlus laser vision correction, followed EYE's warning with one of its own at the end of that same week. The President even announced his resignation. The stock was hammered for almost a 25% decline even though analysts were careful not to pile on this piece of bad news. This stock hit all-time highs twice earlier this year, so I can imagine that LCAV's news was as big a shock to the system as EYE's news was. Even worse is that LCAV provided little detail to explain the earnings shortfall. Finally, folks may finally be connecting the dots in this sector. Eyecare may not be the hot investment it has been for the last several years. If an economic slowdown ever materializes, we should expect that elective eye care will grind to a halt. Regardless, the forward P/E and short interest in LCAV is, curiously enough, almost identical to EYE. So, here to, I suspect a near-term bounce is in the cards, but the good times look very broken down.

After seeing the trouble building with one eye care company after another, I decided to take a quick look around. All I see are stocks in decline or struggling to regain previous glory days. Just check out the charts of stocks like TLCV, ACL (a BOL competitor), ELOS, CUTR... Something is not well in the land of the optometrist. I hope to revisit this story at the end of the year. In the meantime, be careful out there and demand a discount before making your own appointment with one of these stocks.

DrDuru, 2006