Friday, November 14, 2008

LCA-Vision Is Worth A Look

LCA-Vision (LCAV) provides laser vision corrective surgery at 76 locations in the United States. Demand for this surgery comes from those wishing to lose the glasses and contact lenses and get back to 20/20 vision. LCAV's stock has taken a huge beating as a result of the tough economic times, falling all the way from $45 last year to $3 this year. The main reason? A dramatic fall in revenues: demand for this expensive and discretionary surgery is quite cyclical, as we saw here.

But as we know, Wall Street is far too concerned with current earnings. As such, cyclical drops in demand allow those with long-term horizons to pick up companies at a bargain. But while the economy will pick up eventually, it's impossible to know when. As such, one of the most important things to look for with a company like this is its ability to survive a recession. In LCAV's case, it has a quick ratio of 2.2 (meaning payments coming due in the next year should not be a problem) and it has more cash than all of its debt (including short-term debt, long-term debt, and capitalized operating leases).

Its chief public competitor, TLC Vision (TLCV), is currently selling assets and reducing exposure to the volatile (from a demand point of view) laser eye surgery (40% of its business comes from other medical services) as it wrestles with a quick ratio well below 1, and a debt/capital ratio of 80%. Over the years, LCAV has handsomely outperformed TLCV in pretty much every profitability category.

For those who look at buying stocks for the long-term and like to buy when others are fearful, LCAV looks undervalued, and is in a financial position to wait out this downturn. While 2008 net income will likely be close to zero, for the previous four years net income has averaged $29 million a year, while the current market cap for the stock is just $67 million.

Disclosure: None

1 comment:

Anonymous said...

From looking at this previously, they have some of their operations. I haven't looked in a while, but I would assume defaults on those will rise.