LCA-Vision's (LCAV) stock price volatility has helped out many value investors. Many times during the last three years has his stock fallen or risen by 50% or more over the course of just a few months; two such occasions are documented here and here. Now that the stock price has once again dropped to a relatively low level, value investors may want to take yet another stab at this stock.
Though the stock price is volatile, the company's cash flow and cash holdings are remarkably stable. LCA-Vision trades for $80 million, despite positive free cash flow and $50 million of cash, against no debt.
But the problem is, the company just can't cut costs enough to generate a decent return. Seeing as how the company is now facing its fourth consecutive year of negative operating margins, it's clear that LCA-Vision doesn't have the flexible cost structure I once thought it did.
The company has implemented a number of cost reduction programs, including a multitude of store closures. However, even cutting out the weakest stores still hasn't stopped the bleeding, suggesting there wasn't a whole lot of variability in the financial situation of individual stores. There is a fixed cost element to every location, and it seems even the strongest stores aren't able to drive enough revenue to overcome this amount. Marketing spend per person ticked up last quarter as well, as the company desperately tries to lure people in.
But things don't seem to be getting any better. Deferred revenue has fallen significantly in the last six months, suggesting that even the low revenue number the company recently booked is high compared to what it will look like in the future.
Management is taking rational steps to improve the situation. Since cost-cutting hasn't done the trick, the company is looking to generate additional revenue streams by offering services it hasn't offered before. This could work in helping to amortize the fixed costs of the locations across higher revenues, but may not be worth betting on for risk-averse investors.
As humans, we tend to believe our successes are due to skill, and our failures are due to (bad) luck. To avoid falling prey to this bias, we should consciously scrutinize our investment results with a willingness to take responsibility for poor decisions and attribute some of our successes to luck. As LCAV has been unable to pull itself out of its losses now for many years, it may be an example of the latter. Thanks to a volatile Mr. Market that has occasionally become overexcited with respect to this security, LCAV has generated terrific returns for investors who bought low. Though this phenomenon may indeed reoccur, value investors may not want to count on it.
Disclosure: No position