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In the final days of 2023, I concluded that shares of STAAR Surgical (NASDAQ:STAA) were slowly coming in my sight. The manufacturer of the EVO ICL Lens, the clear vision solution for nearsightedness which does not require contact lenses or glasses, has seen steady growth in the business and its market share.
While the long-term promise is evident, the company has seen sales growth and margins come down significantly earlier this year. Given this observation, it was noteworthy that shares saw a huge rally during the spring. Holding a tiny position here, I feel no need to trade out of the shares, or to increase my position.
EVO ICL Lens
STAAR has developed the EVO ICL Lens, which helps patients to get rid of the hassles related to contact lenses or glasses. The implantable Collamer Lens helps patients suffering from nearsightedness with an alternative, providing sharp and clear sight, while avoiding drawbacks such as dry eyes.
Through a small and short surgical procedure, potentially many people can benefit from this alternative solution, with the market still dominant by lenses and glasses.
The company was actually founded in the 1980s already, as the business really started growth since the 2010s. A mere $5 stock in 2015 saw shares peak at $150 in 2021, following a huge and massive share price momentum run.
These share price returns were driven by growth in the underlying business, although that share price advancements outpaced the advancements made by the business. A $125 million business in 2018, which was barely profitable, grew to $284 million in 2022, while operating margins improved to $44 million, for margins around 15% of sales. That momentum in the share price was a bit extrapolated and exaggerated, however, as the company commanded a >$7 billion valuation at the peak.
Shares came back to reality and traded at $60 early in 2023, as the company outlined further growth in 2023, seeing ICL sales advance further to $340 million.
Margin Issues
After the company posted a solid 16% increase in first quarter sales, the company hiked the 2023 revenue guidance, now calling for ICL sales at $345 million. That looked solid, but first quarter GAAP operating profits evaporated to just $3 million.
Second quarter revenues grew some 14% to $92 million, and while margins improved, the company cut the full year ICL sales guidance to $320-$325 million, as the volatility in the revenue guidance was unwelcomed, to say the least. That guidance implied that revenues in the second half of 2023 were seen round $160 million, suggesting that sequential revenue growth would come to a complete standstill.
This caused more pressure on the shares, as shares fell to just $31 in December, granting the business a mere $1.5 billion equity valuation. Based on the full-year revenue numbers, the company traded at a reasonable <5 times sales multiple, yet the issue was that of the abrupt growth standstill and huge pressure on margins.
In fact, third quarter sales rose by just 6% to $80 million, but this included a negative revision of some other products. ICL revenues were up 13% to $81 million, entirely driven by volumes, with prices largely flattish, likely the reason for margin pressure in an inflationary environment, although that the company squeezed out GAAP operating profits of $6 million.
With the fourth quarter revenue guidance implicitly seen between $75 and $80 million, there were few triggers, although that sales multiples were not too demanding in light of growth and a relatively large $200 million net cash position (equal to about $4 per share).
Nonetheless, I was turning somewhat upbeat as the company outlined ambitious three-year plans, calling for 15-20% revenue growth per annum. If the company could deliver on this, it could generate over half a billion in sales in 2026, realistically driving earnings growth of more than $1 per share. That does not automatically look too compelling, yet the long-term growth, distinguished technology and potential M&A interest made me more upbeat and willing to initiate a position in the twenties.
A Tiny Position
As I typically initiate and add to a position on dips, I held a very small position when the company saw shares fall to the twenties early in the year, as a real momentum run pushed shares up to the low fifties in April, now trading at $40 per share.
Early in January, the company reported preliminary fourth quarter sales at $76.5 million, which implies that full-year sales were seen at $322.5 million. The outlook provided for the fiscal year 2024 was not too convincing, with sales seen between $335 and $340 million, marking just very modest growth.
Share traded around the lows in February went the company posted fourth quarter sales of $76.3 million, although accompanied by a solid $10.4 million operating profit. The company reiterated the full year sales guidance and guided for 2024 adjusted EBITDA around $36 million, which frankly was very soft after adjusted EBITDA totaled $56 million in 2023.
In April, the company provided preliminary first quarter sales at $77 million and In May, definitive first quarter sales were reported up 5% to $77.4 million as the company posted an operating loss of $2.3 million. The company maintained the sales guidance for the year and upped the EBITDA guidance by three million to $39 million, as frankly the share price reaction felt like an overreaction to the reported results.
What Now?
Fast forwarding between December and today, shares have seen handsome 30% returns, having risen from $31 to $40 per share, as momentum carried the shares to the fifties in April, a trend which has partially been reversed.
Based on the conference call, it looks as if the company is guiding conservatively and while there might be upside to the guided numbers, the overall current performance feels a bit soft with modest revenue growth seen this year, and earnings seen down. Nonetheless, a current $2.5 billion equity valuation is relatively modest in absolute terms, if the company can disrupt this large market.
Factoring in a quarter of a billion net cash position, the enterprise valuation of $2.2 billion looks reasonable in relation to the opportunity, but the promise of the technology really has to become reality here, not just in words, but in cold hard sales and earnings growth.
Amidst all this, I missed the opportunity to take some chips off the table in the fifties, as for now I am holding a very small position, watching the development unfold with great interest from here.
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