Analysts Say VISX’s Stock Looks Good
Analysts Say VISX’s Stock Looks Good
By Hal Plotkin
Silicon Valley Correspondent
Although at least one prominent analyst disagrees, several others say VISX Inc.’s {VISX} beaten-down stock looks good at its current price level, considering the fact that the company has captured about 70 percent of a market that is growing at 50 percent a year.
But VISX’s stock chart over the past year provides something of an object lesson about what can happen when too much optimism collides with too much pessimism.
VISX’s stock shot up last year on optimism over the company’s commanding position as the pioneering supplier of vision-correcting surgical lasers. Sellers of VISX’s stock began to outnumber buyers late last year, however, when competitors such as Bausch & Lomb Inc. {BOL}, LaserSight Inc. {LASE} and Summit Technology Inc. {BEAM}, began an aggressive move into the same market.
Analysts expressed worries about possible damage to VISX’s bottom line, after the company responded to the new competition by cutting the per-procedure fee it charges to $100 from $250. The fee, which generates the kind of high-margin recurring revenue stream that analysts love, is assessed each time the company’s lasers are used.
The stock was also hurt by a decline in the initial feverish market demand for vision-correction laser surgery, which in many cases restores vision to near perfection. Now that many early-adopting patients with the most-significant vision problems have already rushed to take advantage of the revolutionary new procedure, the analysts say the industry must increasingly rely on business from patients with less-severe vision problems, many of whom appear to be more price sensitive and less eager for surgical intervention.
Throw in the questions that had emerged about the validity of a key VISX patent, which were resolved in the company’s favor last month, and the result was quite a volatile ride.
“This is a stock that was trading at 60 times earnings per share last summer when their market was growing at 100 percent a year,” says Joanne Wuensch, an analyst at ING Barings in New York. “That has cooled down some, but my attitude is, ‘hey, guys, it’s still growing at 50 percent a year!’”
Wuensch initiated coverage of the stock with a “buy” recommendation last February, her firm’s second-highest rating. She has set a 12-month price target of between $42 and $45, which would put it at 32 to 34 times her 2001 earnings-per-share estimate of $1.30.
Last Friday, after VISX reported second-quarter earnings per share that were a penny ahead of analyst consensus expectations, UBS Warburg analyst Rebecca Irwin in New York, upgraded the stock to “buy” from “hold,” setting a 12-month price target of $41, up from her previous target of $33.
Irwin cited several reasons for her renewed enthusiasm. They include a 43 percent year-over-year increase in VISX procedures and more sales of the company’s lasers during the most-recent quarter than she had projected. Irwin had expected VISX would sell 72 lasers during the recent second quarter. Instead the company sold 81.
Irwin also noted that VISX has received Food and Drug Administration approval to start selling its recently developed Star S3 laser in December. The product is designed to compete with newer, and some say more-precise, narrow-beam lasers now being offered by competitors. The VISX technology on the market relies on wider beams that some analysts say are beginning to fall out of favor with vision-correction medical practitioners.
“Although the procedure volume growth impressed us,” Irwin wrote in a report, “we were most encouraged by the strong laser placement. Even in the face of increased competition, doctors appear to continue to believe in the VISX technology.”
“We’re also buyers of VISX stock,” says Kurt Kruger, an analyst at Banc of America Securities in San Francisco. He also has a “buy” rating on the stock, along with a $37 12-month price target.
“Cool-headed investors shouldn’t be kicking this one when it’s down,” Kruger says. “I think it’s possible to make some money on this broken-down jalopy.”
Like Irwin, however, Kruger says that while he expects the stock to move up, it is unlikely that it will quickly return to its previous highs.
“What made this stock so attractive were the high per-procedure fees,” Kruger says. “What’s not clear now is whether they can draw the line at $100 per procedure or whether that’s going to come down. I’d be more comfortable if I saw greater price firmness.”
There are several other risk factors associated with the stock, adds Kenneth Goldman, M.D., an ophthalmologist who is also an analyst at Lehman Brothers in New York.
Lehman Brothers has a “neutral” rating on the stock. Goldman says investors who jump on the VISX bandwagon are taking on some sizable market risks. “VISX has a good machine for now,” Goldman says. “But the perception of the eye-care community is shifting to the view that they don’t have the machine for the future.”
Goldman notes that an increasing percentage of VISX machines are being sold outside the United States, where the company doesn’t receive any per-procedure royalties. During the second half of 1999, for example, 80 percent of VISX laser sales were to customers in the U.S. That number shrank to 58 percent during the first half of the year.
Those numbers leave Goldman concerned about the potential for a consequent slowdown in VISX’s procedural revenue over coming quarters. “We think the competitor machines are going to beat VISX, and it looks like we are going to be right,” he says.
Irwin counters by pointing to the popularity of VISX’s product line, which she says provides the best indication of the company’s success and future prospects.
“I don’t want to minimize competition; it’s a real issue,” Irwin says. “But we’re talking about a company in a fast-growing market that has a 70 percent installed base. VISX has had such a head start.”
Irwin says it is too early to tell whether practitioners will move away from VISX technology toward the narrower beam lasers now being offered by competitors.
“The Star S3 is supposed to be the answer to that,” Irwin adds. “The jury is still out on whether it will be good enough. But the increase in [the number] of sequential procedures is definitely telling us something.”
There could be another good reason to own the stock, says Matthew Dodds, an analyst with S.G. Cowen Securities in New York. Dodds has a “buy” rating on VISX’s stock, his firm’s second-highest recommendation.
Dodds says that the biggest opportunity for VISX investors will come down the line if and when patients with less-significant vision problems, called “low myopes” begin turning to laser surgery rather than eyeglasses. “High myopes,” those with the most-significant vision problems, who have been the first to use the new surgical intervention, account for just 2 percent of the potential overall market, according to Dodds’ estimate.
“You’re talking about a huge upside in the numbers if they can catch the curve of the low myopes as they did with the high myopes,” Dodds says. “It will be the same thing but on a much-wider scale. I think it’s a matter of when, which is why I’m biding my time [before upgrading the stock].”
Dodds also notes that a number of laser centers now offer discounts on the procedure, bringing it down to the $1,000 price level. The question now is how long it will take before average consumers begin to look at laser-vision correction, which has proven safe and effective when properly done, as a routine procedure akin to getting one’s teeth cleaned.
“It’s going to take time for that process to occur,” Dodd says. “It might be apparent over the next few months, maybe by year end. But until then, I think it’s safer to wait before pushing the stock more aggressively. It’s a little too early to make the call.”
Analyts Irwin, Kruger and Wuensch, however, say they think the best rewards will go to those who get into the stock before there is unanimity about where it is headed.
“We’re showing a revenue base for 2000 that is higher than 1999, and 2001 higher than 2000,” Kruger says. “Our belief is that they are on a growth track that has helped them absorb the price decrease. It won’t be the same kind of growth they’ve shown before, and they will have to absorb an eventual drop in laser sales. But it all blends out to a modest growth story for the company. We think it should move up to the high $30’s.”
