I’m sure many of you are saying “No duh, Davy! The stock’s only down 10%
today after cutting the dividend.” But I’ve actually been looking at this stock
for a few months now. Generally, I usually don’t post about stocks on my
watchlist unless they get added to the portfolio.
That said, I bring up LCAV (and don’t forget HRZ) as a reminder of the
importance of avoiding mistakes as opposed to the all-consuming drive to pick
winners. It is very similar to the concept of unforced errors in tennis. A
tennis player can go a long way in that game just by keeping the ball in play
and avoiding forced errors. The same principle is doubly valid for sound
investing.
LCAV’s Q1 2008 results pretty much put me off the stock. Result deterioration
was fairly dramatic, liquidity situation is worsening due to ARS, and the FDA
kicked the down dog with public hearings over bad procedures in the past.
Subsequent to Q1, the company took out $19M of debt and of course, today
announced a massive divvy cut from $0.18 per share to $0.06.
You can find my previous research below.
(04/15/2008)
LCAV performs
laser corrective eye surgery through 74 LasikPlus vision centers located in 33
states. The company estimates its market share at about 15% in a
highly fragmented industry where over 60% of laser corrective procedures are
performed by individual surgeons and hospitals. LCAV is the largest publicly traded competitor in
this space.
RISKS
- Significant operating leverage cuts both ways.
The company’s costs are high and fixed to a certain degree.
Management estimates a 10% decline in procedures industry-wide for
2008. During the last economic downturn (2002 – 2004), procedures
dropped off nearly 20% over two years. Any significant drop-off flows directly
to the bottom-line and lead to losses. I would guesstimate fixed
costs anywhere from $200 - $270M for 2008 (~$247M in 2007).
Revenues for 2007 came in at $292.6M.
- The company, in defending its marketing results, implied
that its sales force is not performing up to expectations.
Management has announced a sales training program to address this
issue. But any difficulties in closing sales will only exacerbate
any industry-wide slowdown.
- Big exposure to a US recession.
