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Bear of the Day: STAAR

STAAR Surgical (NASDAQ: STAA) recently reported disappointing third quarter results, as the company missed expectations for both sales and earnings. Analysts have revised their estimates sharply lower for both this year and next, sending the stock to a Zacks Rank #5 (Strong Sell).

While the stock has sold off heavily so far this year, it doesn’t look like much of a value at more than 100x forward earnings and 8x book value.

STAAR manufactures and sells implantable lenses for the eye. Its Implantable Collamer® Lens or “ICL” is used in refractive surgery as an alternative to LASIK. Its intraocular lens or “IOL” is used to replace the natural lens after cataract surgery.

Approximately 60% of its net sales year-to-date came from ICLs, with 32% coming from IOLs. The remainder comes from other surgical products. Over 85% of its sales come from outside the United States, including nearly 25% from Japan.

Third Quarter Results

STAAR delivered disappointing third quarter results on October 30. Adjusted earnings per share (but including stock-based compensation expense) came in at a loss of 4 cents, missing the Zacks Consensus Estimate of +$0.03.

Total sales rose 8% to $18.2 million, but this was well short of the consensus of $19.0 million. Sales of ICLs declined 1% while IOLs rose 8%.

Strong growth in China and Japan was somewhat offset by a whopping 45% drop in Korea. The company believes this plunge was driven by negative LASIK press in Korea from an investigative journalism program aired by the Moonhwa Broadcasting Company network in July 2014.

Meanwhile, the gross profit margin declined from 70.5% of sales to 65.3% while operating expenses jumped 13%.

Estimates Falling

Following disappointing third quarter results, analysts lowered their estimates for both 2014 and 2015. This sent the stock to a Zacks Rank #5 (Strong Sell).

The 2014 Zacks Consensus Estimate is now -$0.15, down from +$0.01 before the report. The 2015 consensus has fallen from $0.36 to $0.09 over the same period.

You can see the sharp drop in estimates in the company’s “Price & Consensus” chart:

Lofty Valuation

While shares of STAAR are down more than 50% from their high in April, the stock still doesn’t look like a value here. It trades at more than 100x the current 2015 consensus and more than 8x book value.

And through the first nine months of 2014, it had negative operating cash flow.

The Bottom Line

With declining profit margins, declining earnings estimates and lofty valuation, the near-term outlook for STAAR doesn’t look bullish.

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