Robert,
Just in case you didn't see this:
Stock of the Day
Jul 19, 1999
VISX: Still Great Growth Visibility
by Chris Bulkey 7/19/99
The desire among the four-eyed set to shed their specs has made VISX (NASDAQ:VISX - news) one of the hottest non-Internet companies around.
Since last year its stock has swelled more than 9 times to $93.19. And after the company beat earnings estimates again last week, Wade King, an analyst at BancBoston Robertson Stephens, raised his price target to $115 and recommended that investors "aggressively purchase shares on any significant weakness."
Why? The company controls more than 70% of the market for the revolutionary laser surgery to correct many vision problems. And according to the company, there are over 157 million people in the United States alone with some form of vision problem.
The number of laser procedures has increased from 70,000 in 1996 to 420,000 in 1998, a compounded annual growth rate of 145%. In 1999 VISX estimates that there could be up to 900,000 procedures, more than double last year.
No surprise, in its most recent quarter, revenue soared 97% to $62.5 million, while earnings (excluding a litigation charge in the prior year and applying a normalized tax rate) rose 113% to $0.32 per share, $0.03 per share ahead of First Call consensus estimates, thanks in part to gross margins that swelled to 80%.
VISX incurred a $35 million litigation charge last year stemming from a patent infringement dispute. It remains in the appeals process and figures to take several more years to reach a final decision. Until that time all patents remain valid and enforceable, which will give VISX more time to further its industry leading position.
Aside from a booming domestic market the company also sees opportunity overseas, particularly in Japan. VISX has received regulatory approval for therapeutic procedures, which include corneal scarring and other dystrophies. Applications have also been submitted for myopia (nearsightedness) and astigmatism, and it is possible that approval could be granted by the end of the year.
On the heels of a blowout third quarter, earnings estimates are going up across the board. The company has cautioned that the third quarter could see some softness due to summer seasonality, but the guidance is fully reflected in analysts forecasts. Hambrecht & Quist analyst Robert Faulkner appears to be ahead of the curve with his estimates, and has put the company on his focus list.
Faulkner expects VISX to earn $1.34 per share (up from his prior estimate of $1.17 per share) in 1999 and $1.75 per share (up from $1.50 per share) in 2000. In 1998, VISX earned $0.60 per share, which puts the company on track to post a three-year compounded annual growth rate of 71%.
A $6.5 billion company generating that kind of high growth with improving margins and a propensity for upside earnings surprises certainly warrants a premium valuation.
The balance sheet and cash flows are also solid. VISX is debt free while operating cash is also accelerating. First quarter cash flow came in at $19.8 million, well ahead of full year 1998 when operations generated $14.1 million.
Based on Thursday's closing price of $93.19, the shares trade at 53 times Faulkner's forward estimate. A multiple in line with VISX's secular growth rate equates to a 12-18 month target of $122.50.
Bottom Line:
Momentum stocks are prone to volatility, so we recommend building a position slowly, which would enable investors to take advantage of any pullbacks.
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I think this is the place to be until the 'tech-wreck' passes.
Best,
Steve
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