Thursday, February 19, 2009

LCAV: Revenues Bottomed?

Last week, LCA Vision (LCAV) reported results for its fourth quarter ending Dec 31, 2008. Demand for its LASIK eye procedure dropped a staggering 50% from one year ago. However, this should not come as a big surprise, since we saw earlier that demand for this surgery is highly correlated to indexes of consumer confidence, which are currently running at about half of what they were last year.

We can only guess as to when the economy will return to its full potential. Therefore, what makes LCAV appealing for value investors is its strong financial position. While its chief competitor TLC Vision (TLCV) flirts with bankruptcy and a 15 cent/share stock price, LCAV holds $56 million in cash compared to debt obligations of just $21 million.

While LCAV's cash position suggests it has some breathing room, it means little if the company is losing cash hand over first: the company lost $8 million in its fourth quarter, suggesting the cash could get depleted quickly. Therefore, it's important to get a good read on how well LCAV is able to reduce its costs. Reading the company's results reveals that LCAV has cut costs such that its break-even rate for 2009 is 110,000 surgeries, down from 170,000 in 2007. The number of procedures performed in 2008 was 115,000.

While profits for the next several months are not likely to break the bank, LCAV offers investors with long-term horizons the opportunity to buy a company with enormous future profit potential at a cheap price. The company is safe (from a cost point of view and due to its cash position) but trades at a market cap of only $64 million, but averaged net income of $30 million per year for the four years ending in 2007.

But perhaps the most bullish indicator for this company is its improved marketing efficiencies. Late in 2008, the company experimented with a marketing approach that yielded a 30%+ increase in demand. The company also reported that January 2009 procedures (not included in the 4th quarter results) were up 48% from December, compared to a 14% increase year over year.

While investors should not expect enormous profits right away, they can take advantage of a stock price that may have been unjustifiably hammered from a peak of $45 to its current share price of $3.

Disclosure: None

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