LCAV and LVCI are two of my largest holdings (in addition to OHSI and VISX). As I have stated before, in the very early stages of any new industry, there can be many competitors all of which are profitable (and are growing rapidly). With such a huge, untapped supply of potential customers, all of the major players can grow rapidly and not have to compete with each other much.
LVCI, LCAV, and OHSI all have centers in small markets. This is a distinct competitive advantage because they do not have to compete much against large individual practices and other laser centers. I do not hold LZRC, even though it is the largest player, because I believe it faces the greatest competition (as its centers are located in large markets). If you read the SEC filings of all the laser centers, you will see statements such as the one below from LVCI:
AN INCREASE IN THE NUMBER OF EYE SURGEONS WHO PERFORM ENOUGH EXCIMER LASER PROCEDURES TO ECONOMICALLY JUSTIFY THE PURCHASE OF THEIR OWN LASERS MAY HARM OUR BUSINESS
As excimer laser surgery becomes more commonplace, the number of eye surgeons who can economically justify the purchase of their own laser may increase. Unless the number of laser surgeries performed by eye surgeons who use our services significantly increases as well, our business could be materially harmed. Laser surgery is still a relatively new procedure for most eye surgeons, and it generally takes time for eye surgeons to build up their case volume. Eye
surgeons who use our services perform an average of 20 to 30 procedures a month.
We estimate that an eye surgeon or practice group needs to perform approximately 60 procedures a month in one location in order to economically justify the purchase of an excimer laser. This estimate is based upon a number of factors including current prices for excimer lasers, current procedure fees charged by eye surgeons and our current per procedure fee. This estimate does not take into
consideration the value an eye surgeon may place on our maintenance and support services.
Thus, an eye surgeon in a large market will more likely reach the critical mass of procedures needed to justify the purchase of a laser. And consequently, LZRC will face greater competition than the smaller players in small markets.
Further, once one of the three smaller market centers ties up a small market (such as OHSI in Metairie, LA) it is not economically reasonable for anyone else to set up shop there. There is only a limited number of eye surgeons in a small market.
Once we reach the point of saturation, there will price competition to some degree (although who would want to have a surgical procedure performed by the cheapest location and surgeon?). At this future time, there will be a consolidation in the industry and only a few players will survive. But the holders of the stocks in the industry will have reaped great profits by then.
Finally, it is not clear who will come out on top in the long-term among the laser centers. LVCI and LCAV have both completed stock offerings and are flush with cash to open new centers. OHSI is opening centers at a rapid rate and has a built-in supply of eye surgeons. LZRC is still the biggest player and has agreements in place with large health care providers. All of the laser centers are in good shape financially and have relatively clean balance sheets.
At this point, I am spreading out my bet across the board. All the players are very expensive if you take a look at historical PE ratios. But I believe they are all very inexpensive relative to the growth to be seen over the next few years |
