23 December 2005 - BOL moved to restate financial results back to 2000 because of accounting shenanigans at its Brazilian unit. Stock price falls from $79 to $72. 26 January 2006 - BOL says it will postpone its earnings filing to investigate improper booking of sales at its South Korean subsidiary. ($68.56) 2 March 2006 - declares dividend $0.13 31 March 2006 - First reports of fungal infections surface ($63.70) 10 April 2006 - BOL suspends shipments of ReNu ($57.44) 11 April 2006 - Company defends ReNu, says all tests are negative, Walgreen pulls entire line of ReNu, WalMart pulls the specific product. ($45.60)
These events usually qualify as one time opportunistic buys in my book, but this is one is hard to call. Here are the facts:
According to the 10Q filing dated 28 July 2005 (last filling on record). The six month revenues were broken out as follows:
Contact Lenses $359 M Lens Care $269 M Pharmaceuticals $ 278 M Cataract & Vitreoretinal $ 185 M Refractive $ 72 M Total (6 months) $1163 M
Lens care generated about 23% of the company's revenue. 2005 revenues from ReNu are estimated at $45 M, about 2.25% of the total $2.3B. In the US there are reportedly 109 cases of "Fusarium" fungal infection reported by the CDC and according to a Business Week article about 36 million Americans wear contact lenses. Of the 30 cases investigated to date by the Food & Drug Administration, 28 wore contact lenses, and 26 of those patients used Bausch's popular ReNu products to clean and store their lenses. To date no direct link has been found to the usage of ReNu and the fungal infections. From the numbers and the facts it seems like this may not be a big deal.
The key here though is the statement from Walgreens released last week -"There's a lot of customer confusion out there, which is why we decided to remove the entire ReNu line, - a Walgreen spokesman told Reuters." What is it that first comes to mind when you hear the words Baush & Lomb? Eyes, eyecare, contacts!!!! right. So calling this a Tylenol scare like situation that J&J (NYSE:JNJ) was in is incorrect. After all, J&J is a very well diversified company selling Cordis heart stents, baby lotions and Band-Aids.
Although ReNu may be only 2% of revenue as the Walgreen statement implies, Bausch &Lomb means eyecare to most customers and spillover effects are bound to affect sales in general. Moreover, according to the 10Q "Growth for the first six months of 2005 was driven by share gains attributable to the Comapny's ReNu with MoistureLoc brand, the ReNu franchise gained 2% market share in Q2 05." So this was a major growth engine for the company.
Back to the fundamentals: before the fungus story broke but after the accounting irregularities were uncovered, the company traded around $65 a share - market cap of $3.5 B on sales of $2.3B a P/S ratio of 1.52
Lets look at the most pessimistic scenario for this company. Assume that the company loses all of its share of lens care of about $ 500M and spillover into other areas, legal liabilities causes loss of another 15% of revenues $300M. This would imply a 2006 revenue number of about $1.5B (assuming no growth in other areas).
Now at today's price $45.6 (Market cap $2.45B) this gives the company a P/S of 1.63, still higher than the 1.52 it sported on March 30th. At $42.5 the stock should reflect its pre infection value.
So in conclusion, the company is in deep trouble. It has a great brand and franchise but its entire identity is associated with this franchise "eyecare", something people take very seriously. I believe that the company will recover and thrive but I want the classic "Margin of safety" before I play this one. I'll assign a 20% margin of safety and using $42.5 as my benchmark. I would be a buyer at anything south of $34 a share. Speaking of J&J, once the air on this issue clears up they may just swoop in and buy BOL.