Midnight Studio
As recently as October, I believed that STAAR Surgical Company (NASDAQ:STAA) was not getting in my sights just yet. With its EVO ICL Lens, used to deal with nearsightedness, the company offers a clear vision which does not involve the hassles of contact lenses or glasses.
The category at large has gained market share, driving steady growth in STAAR’s operations, although a growth slowdown meant that I lacked conviction to get involved. With shares down quite a bit, and a solid three-year plan being outlined, appeal is rapidly improving. Despite this observation, it seems just a bit too early to pull the trigger here.
Can You See The Vision
STAAR is the developer of the so-called EVO ICL Lens, also known as EVO, which helps consumers to get rid of hassles related to contact lenses and glasses. The implantable Collamer Lens helps patients who suffer from nearsightedness.
The EVO ICL Lens provides sharp and clear sight, but avoids drawbacks such as dry eyes, while it brings harmony with the natural eye. Its surgical procedure is relatively small and short.
The potential for this solution is large, as some 2 billion people in the globe struggle with vision. The solution has gradually gained market share, as the category at large holds about 10% of the market across the globe.
Founded in the 1980s, STAAR struggled for a very long time, but the business and shares really took off during the 2010s. A $30 stock pre-pandemic rose to a peak of $150 in 2021, before falling to the $40 mark in October.
The business posted $124 million in sales in 2018, on which it posted minimal GAAP operating profits. Strong sales growth made that the business grow its sales to $284 million in 2022, essentially all generated from sales of ICL products. Operating profits of $44 million worked down to 15% margins, as net earnings of nearly $39 million came in at $0.78 per share.
2023 – Tough So Far
A $50 stock early in 2023 commanded a $2.5 billion equity valuation, marking a premium valuation despite the existence of a net cash position. The company guided for solid growth, with 2023 ICL sales seen at $340 million.
After a 16% increase in first-quarter sales to $73.5 million, on the back of which the full-year ICL sales outlook was raised to $345 million, it all looked good, except for the margins. The issue was that GAAP operating profits evaporated to less than $3 million.
Second-quarter sales rose 14% to $92 million, and while margins were still down year-over-year, they improved markedly on a sequential basis. The issue is that after a $166 million revenue number so far, the company cut the full-year ICL sales guidance to $320-$325 million. That suggested about $160 million in revenues in the second half of the year (at best), arguably not boding well for the margin profile.
With 50 million shares trading at $40 in October, a $2.0 billion equity valuation included a net cash position which just exceeded the $200 million mark. The enterprise valuation came in at less than 6 times sales, but the issue is that growth is coming to a standstill and no real earnings are seen. Moreover, there was no real good explanation for the sudden slowdown in the performance, making me cautious to get involved just yet.
Recent Events
Fast forwarding from October to December, shares have fallen from $41 to $31 and change, as the move cut the equity valuation from $2.0 billion to $1.5 billion.
On the first day of November, STAAR posted a mere 6% increase in second-quarter sales to $80.3 million, but this included a negative revenue contribution (reversal) from other products. Core ICL revenues grew by 13% to $81 million, on the back of a 14% increase in volumes. This stands in sharp contrast to the entire market, whose volumes were seen down.
GAAP operating profits of $6 million and change worked down to margins of nearly 8%, with GAAP earnings reported at $0.10 per share. While the company posted adjusted earnings of $0.31 per share, most of the discrepancy comes from the exclusion of stock-based compensation expenses.
By now, the company sees ICL sales at the lower end of the $320-$325 million range, which feels a bit soft after ICL sales already totaled $245 million in the first nine months of the year, indicating a $75-$80 million implied guidance for the fourth quarter.
With the equity of the firm today worth $1.5 billion, while the net cash position of around $200 million remains intact, it is a $1.3 billion enterprise valuation which reveals that expectations come down a lot. The business now trades at 4 times sales, while these sales grow at a double-digit percentage, which looks cheap, but the margins are the issue here.
And Now?
Alongside the third quarter earnings release, the company announced that it sees 15-20% annual revenue growth for the coming three years, something which looks simply solid. If the company can deliver on these promises, revenues should come in close to half a billion dollars, at the lower end of the revenue guidance.
In fact, the company sees full-year sales at $500-$550 million in 2016, with operating profits seen at $60-$90 million. An unleveraged business should be able to post after-tax profits of $60 million at the midpoint of the range, working down to earnings of around $1.20 per share.
With shares trading at $31, and after deducting about $4 per share in net cash, the company trades at 22 times forward earnings in about three years in time, something which looks a bit demanding.
Then again, shares are back to the lowest levels since 2018, as I furthermore recognize that incumbent players in other areas of the market might be interested in such a business, spurring potential takeover interest. Amidst all this, I am getting more upbeat about STAAR Surgical Company shares, but require some margin expansion and/or a fall to the twenties before initiating an initial position.
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