Here are some musings that I did over VISX from a fundamental point of view. Just in USA alone, there are 90 mil. people who are near sighted and another 70 mil. who are far sighted (this number should increase as the population ages). So in all, the total market for VISX in USA is ~160 mil people. Let's say Europe an Asia account for another 210 mil. people (I think the number should be higher, but I'm just guessing on the cautious side). So the potential users of VISX are 370 million people. Let's try to estimate the total EPS for VISX, over the next say 10 years (i.e assumption number two, the use of laser surgery will saturate within 10 years). Since there are 15.4 million shares outstanding, each share is entitled to 24 users. Assumption number 3, let's say only one in four people will swap his contact lens for VISX process. So each VISX share will have 6 people. At two eyes per person and $250 royalty per eye, the revenues per share are $3,000. Profit margins are ~40% and improving, but to be cautious (and lazy with the math) let's say the net margins drop to 33%. Then each share of VISX will earn $1,000 over the life of the current business line (i.e if VISX does not diversify into other business lines). The question then is, is it worth to pay $58 today to earn $1,000 over the next 10 years.
This example illustrates how I look at a company's fundamentals:
(1) I identify the time span over which I am interested in the company.
(2) I list my expectations (vision) of how the business will be going forward.
(3) I estimate the business value over the time horizon. I often do this by comparing the earnings yield to that of treasuries' with maturity of the time horizon and then I risk adjust the model and add in the remaining enterprise value. I did not do this now because it's Friday and I want to leave my office ;)
(4) To estimate the earnings and business worth, I live and die by two numbers only: Revenue, and Operating Margin. Everything else is subject to accounting magic and I pay little attention to them (though I do watch debt, inventory, and receivables to check on the business health).
After all the talk on technical analysis that we've had, I thought a bit of FA was needed for the balance. Incidently, I consider myself more of a fundamentalist than a technician, in that I choose my companies primarily on fundamentals, and then pick the ones with suitable trends.
Have a nice weekend
Sun Tzu
P.S. As always, I value a good arguement (or discussion) more than an agreement. |
