One More Eyesore - Advanced Medical Optics

By Dr. Duru written for One-Twenty

NOvember 22, 2006

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In early October I reviewed a bunch of stocks related to eyecare. The sector was looking unhealthy then and today things got decidedly worse for one of these companies - Advanced Medical Optics (EYE). When I last wrote about them, I declared the writing was on the wall - the fun times are over. Sure enough, EYE delivered more bad news to investors on Tuesday:
"[EYE] today announced a nationwide, voluntary recall of certain lots of its 12-ounce COMPLETE(R) MoisturePLUS(TM) multipurpose contact lens care solution and Active Packs. Three lots sold in Japan were found to have bacterial contamination, which compromised sterility. Because of this production-line issue at its manufacturing plant in China, AMO is recalling 18 lots distributed in the U.S. that were manufactured on the same production lines during the same production period. Non-sterility of a contact lens solution may have serious health consequences, including eye infection and microbial keratitis. AMO has not received any reports of adverse health events associated with the recalled product lots in the U.S."

Surely this news immediately conjured up images of Bausch & Lomb's (BOL) struggles over the past year to deal with its own product issues. So, investors wasted no time in dumping EYE's stock overboard for a 9% loss on the day. While I have emphasized this year buying on such panic responses, I cannot qualify EYE as an opportunity to snatch up shares on the cheap - even with shares at near two-year lows. As I pointed out in the earlier missive, EYE has had financial issues, and the business seems to be struggling. The company admits that this recall will have serious financial consequences stretching out through 2007. Production at the impacted Chinese facility will be suspended for 10 -12 weeks. The product recall could be the climax of their problems, or it could be additional confirmation of just how bad things have gotten. I am guessing that a bias to the latter is the way to go. The company will have an opportunity to put a positive spin on things at an analyst conference on November 29. Those interested should also keep an ear close to the next earnings conference call.

It is also ironic that EYE was hitting a peak as BOL's problems climaxed. Today, BOL soared 5% when word first dropped of EYE's woes before settling back down a little over a point. The stock of competitor Alcon (ACL) soared over 6% and was able to hold onto most of its gains. However the stock was already in the process of a sharp bounce from a bottom and today's news gave additional reason for shorts to cover and value chasers to buy in. Since I last wrote about this sector, I have been in and out of BOL and COO. Both have returned to my original buy points after I sold them, but only BOL still remains somewhat positive from a chartist's viewpoint. COO is now below the 50 day moving average and will likely go even lower before it goes higher.

Business still appears bad in the eyecare business, and EYE's production problems create one more eyesore. Since I have studied BOL the most, I would say that if there is any excuse to buy something here, it is BOL. Analysts seem to think ACL is also a beneficiary of EYE's problems. Regardless, keep an eye on the situation, look carefully, and be careful out there!

DrDuru, 2006