Don't Lose Sight of LCA Vision's Value

LCA Vision (LCAV) is a provider of laser vision corrective surgeries. Demand for these non-essential, expensive surgeries is strongly correlated to levels of consumer confidence. As one can imagine, this correlation has resulted in the number of surgeries performed this year being slashed in half as compared to last year. Combined with the fact that the company's cost structure is fairly rigid (medical/laser equipment, service locations and staff still have to be present even if not used to capacity!), and the prospects for this company look grim.

This business model would make most investors head for the exits in economic times like these. For investors who look to buy businesses rather than stocks, however, this company still has some value. And it is precisely because most investors headed for the exits that value investors were able to buy into this company for far less than it is worth.

When we last looked at LCAV, it traded with a market cap of $64 million, despite the fact that it had $56 million in cash alone! When looked at from the point of view of a buyer of an entire business (as value investors like to do), one was essentially paying $8 million to purchase a business that had earned an average of $15 million in net income the last four years. Yes, it had lost $7 million in the last quarter, but management was closing unprofitable locations, reducing capital expenditures, and is believed to have cut expenses such that the company's cash flow would break even in 2009.

Since the stock's low just two months ago, the stock is up some 200%! Investors who avoided the herd mentality, and instead focused on buying businesses selling for below their worth, were handsomely rewarded.

Disclosure: None

Comments

[TATyszka:]

You think this stock tripled because of investors with a value bent, not a herd mentality? In case you haven't noticed, the NASDAQ and OTC are chock full of small-caps that have doubled and tripled or more since March. Is this all due to the rediscovery of "value" in these issues? It seems any piece of trash with a sexy story or that has anything to do with solar power, wind power, or other fads has been swept up in this rally. That's not to say that LCAV is trash. All I'm saying is don't mistake a bull market for genius.

May 17 12:07 PM

[Saj Karsan:]

Hi TAT, I'm not claiming rediscovery of value caused the appreciation. But I am saying buying businesses below their worth puts investors in a position to profit, as downside is low and upside is high (relatively).

May 19 03:44 PM

[LasikInvestor:]

There is no way this Company will be cash flow positive in 2009. They had GAAP EBITDA of $179,000 in Q1 09 but that includes $2,753,000 of noncash amortization of deferred revenues. If they burned cash in the seasonally strongest quarter of the year there will be alot more cash burned as the year progresses.

Jun 25 12:38 PM

[jmmx:]

One of the things that was driving LCAV down was the uncertainty of the challenge to the management team by the "Full Value Committee" The upsurge in their price occurred at precisely the time that challenge was dropped - tho perhaps somewhat coincidentally to the broader market move.

The management is trying to cut costs and has enough cash to ride out a couple of years of recession if necessary. They would then be in a very good position for incredible growth.

One problem is that while they CLAIM to have cut costs sufficiently, we do not have any data yet on how successful that has been. So the next eranings report will show a lot.

Still, my big question is this: what if the recession is longer and deeper than we expect? The effect on LCAV is potentially catastrophic.

Jul 02 02:12 PM