Is it Time to Buy LCA-Vision?

| About: LCA-Vision Inc. (LCAV)
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Eyeballing the share activity of LCA-Vision Inc. (Nasdaq: LCAV) over the past couple of months has left investors rubbing their eyes. The most pressing question: should they take a myopic view of LCA-Vision and maintain a hands-off stance, as it seeks to recover from a recent deep-sea price plunge? Or should they take a more far-sighted outlook, jumping in on a possible buying opportunity and grabbing this beaten-down stock that could provide a tidy profit should it recover?

LCA-Vision is a Cincinnati company that operates 72 LasikPlus vision-correction centers in 31 states and Canada. LCA-Vision’s corporate predecessor, Laser Centers of America, was founded in 1985 by a former surgeon as a management company to help hospitals implement the emerging technology of laser and minimally invasive surgery.

Analysts who follow the company currently are split nearly down the middle in their view of LCA-Vision’s stock outlook, with a bias toward the buy side, according to a Thomson Financial tally. Of the seven analysts polled, three have the equivalent of a “hold” rating on LCA-Vision, while two say “buy.” But two analysts also have the equivalent of a “strong buy” on the stock, including one upward revision August 20. None of the analysts say “sell,” despite the recent share slippage, or perhaps because of it.

When laser vision correction arrived in the 1990s and the U.S. Food and Drug Administration approved in 1995 the first of several types of treatments, LCA-Vision began a rapid commercial rollout. The Lasik procedure came on the scene in 1997 and LCA-Vision’s business took off.

The company says that it has performed more than 800,000 laser vision correction procedures. From 2004 to 2006, the number of procedures performed in LCA-Vision centers more than doubled, to 185,268. LCA-Vision sees strong growth potential, estimating that half the American population needs vision correction, and that fewer than 10% of the people have undergone a laser-type process.

While revenue nearly doubled over that two-year period for LCA-Vision, the same can’t be said for the payback to investors. Earnings per share fell from $1.53 in 2004, to $1.34 last year.

July saw a stunning turnaround for the stock of LCA-Vision – for the worst. After opening the month by hitting a 52-week high of $50.69 on July 5, LCA-Vision shares tumbled 17% during trading on July 31 after the company reported disappointing second-quarter profits and slicing its guidance – after having reaffirmed its earlier guidance in May.

In the July report, LCA-Vision said revenue increased 16% to $60.3 million, net income fell to $7.4 million from $8 million, and earnings per share slipped a penny to $0.36. But the company’s new clarity in its guidance for the rest of 2007 was what really spooked investors: full-year revenue of $308 million to $315 million, as it trimmed the top end of the range from $321 million; and an earnings per share outlook of $1.90 to $2, down from $2.05 to $2.15.

That July low wasn’t the worst price that LCA-Vision’s investors have weathered in the past year. The stock fell to $29.90 last Oct. 4, in the days after the company trimmed its 2006 earnings guidance and said its president had resigned. Earlier in 2006, shares had traded as high as $58.25. The company went public in 2002 as a $2 stock, and until 2004 shares often traded around $3. On Tuesday LCA-Vision closed at $32.90.

“Our focus the balance of this year will be in three key areas: People, marketing and metrics,” said Steve Straus, LCA-Vision’s chief executive, on a conference call with analysts to discuss the second-quarter results on July 31.

Straus noted some key personnel additions, improved marketing plans and an aggressive expansion in the top 100 markets.

“I believe we are the victim of our own inefficiencies right now,” Straus said, emphasizing how the company is enhancing its marketing. “I don’t see us losing any measurable market share through competition, and in many consumer markets across the country we are seeing some softness.”

The company also is preparing to roll out IntraLase -- a new type of laser technology, which is being tested at eight locations -- in more of its centers in 2008.

LCA-Vision, which was listed at No. 9 on BusinessWeek’s “Hot Growth” company list for 2006, also played out its own version of “Family Feud” last year. Company founder Stephen Joffe departed as chairman and chief executive after it was disclosed that he had privately acquired a 7.7% stake in LCA-Vision’s leading competitor, Canadian company TLC Vision Corp. (Nasdaq: TLCV).

The founder’s son, Craig P.R. Joffe, insisted he was not aware of his father’s investment moves. Craig Joffe was named interim CEO, but was replaced last November by Straus. The younger Joffe resigned as chief operating officer in March.

It’s possible that analysts are starting to feel that past problems at LCA-Vision are clearing up. Last month, Raymond James analyst John Ransom increased his rating to “outperform” from “market perform.” Ransom also raised his full-year earnings-per-share estimate to $1.97 from $1.93, a little lighter than company guidance, and increased his forecast for 2008 to $2.36 from $2.20.

In his note to clients, Ransom said he based his opinion on “the likelihood of better marketing yields, capital deployment, and an improved relative valuation, although we are cognizant of the risks associated with possible near-term fallout in consumer sentiment.”

Following the July 31 results, two analysts maintained their ratings on LCA-Vision. Anthony Ostrea of JMP Securities kept an “outperform” view of LCA-Vision, but trimmed his target price to $41 from $50. Kevin Ellich of RBC Capital Markets kept his “sector perform” rating on the company, but reduced his share target to $38 from $45.

LCA-Vision could be tempted to quickly wrap up the $35 million left in its current $50 million share-buyback program, given the recent share price weakness.

For the majority of patients, Lasik vision correction falls under the category of elective surgery, and they usually have to pay for it themselves. With the economy’s summer turmoil continuing as the third quarter winds down, potential customers of LCA-Vision might be having second thoughts about going through the procedure now.

During the conference call, LCA-Vision executives mentioned that they were seeing more customers defaulting on their company-sourced loans for their vision correction procedures, probably due to the fallout from the mortgage crisis.

“I think we’re seeing a little more early default rates by consumers that we didn’t probably see a year ago,” Chief Financial Officer Alan Buckey said, “where some folks are defaulting within the first 90 days of taking out a loan. So I think the consumer is a little strapped.”

A pickup in the economy could help LCA-Vision’s stock return to levels more pleasing to investors.