Friday, July 16, 1999
DJIA 11164.25 -22.16 (-0.20%) S&P 500 1410.05 +0.43 (+0.03%) Nasdaq 2854.05 +14.68 (+0.52%) Russell 2000 464.21 -1.59 (-0.34%) 30-Year Bond 91 6/32 +14/32 5.88 Yield

An Investment Opinion
by Matt Richey

Clear Vision at VISX

VISX Inc. (Nasdaq: VISX) continues to move up after reporting strong second quarter results after market close on Wednesday. The leading manufacturer and marketer in the fast-growing laser vision correction industry reported earnings of $0.32 per diluted share, three pennies better than analysts' predictions.

U.S. consumers are rapidly warming to the idea of laser eye surgery. The promise of a life without contacts or glasses is driving demand for the company's proprietary VISX System, which is composed of an excimer laser and computer-driven work station. During the quarter, the company shipped its 500th VISX Star Laser. Now, with the industry's largest installed base of lasers and hundreds more than its closest competitor, VISX is well positioned to capture a large share of the accelerating consumer demand. Last year, the company performed 400,000 procedures, and another 900,000 are expected this year. But with 157 million people in the United States who experience some form of nearsightedness, astigmatism or farsightedness, this growth story is just beginning to unfold.

The latest 10-K does a nice job of detailing the highlights of the company's history:

"In the early 1980s, experts thought it was impossible to operate directly on the front of the cornea. In 1987, doctors using VISX equipment performed the first procedure for the treatment of nearsightedness in the United States.... In March 1996 the FDA approved the use of the VISX System to correct mild to moderate nearsightedness. That approval was supplemented in April 1997 with approval to correct astigmatism. In January 1998 [VISX] became the first company ever to receive FDA approval to use a laser to treat higher myopia with or without astigmatism. In November 1998 [VISX] received the first -- and still only -- FDA approval for the correction of hyperopia or farsightedness with a laser."

Last Friday, VISX unveiled its first nationwide brand advertising campaign with a full-page color ad in USA Today. Even without a formal ad campaign, VISX brand awareness has been spreading rapidly via word of mouth due to the success stories of thrilled patients who report dramatically improved -- if not fully-restored -- vision after what is only a 30 minute, painless outpatient procedure. Of course, the procedure has its risks and side-effects, but they are minimal and rare for the most part.

VISX has 140 existing and 70 pending U.S. and foreign patents to protect its technology. The company expects that other excimer laser products that come through the patent process will infringe on the company's patents and thus require a license. Thus, the company's patents create a formidable barrier to any would-be competitors. In addition, the company earns revenue not only for laser systems sales, but also for each performed procedure through "VisionKey card" sales. This programmable card allows for the collection of patient data and software upgrades, but more importantly it is required to operate the VISX System. And, because a unique VisionKey card must be used with each procedure performed, the company earns guaranteed royalties for each operation.

Through patent protection and strategic technology, VISX's business model is highly profitable. In the just-completed second quarter, the company achieved 80% gross margins and 54% pre-tax operating margins. Profits of $21.5 million understate the actual cash gains during the quarter -- with no debt, the company grew its cash balance by $37.1 million to a total of $189.4 million. In addition, working capital management showed a sequential improvement with the cash conversion cycle down to 58.7 days from 65.1 days in Q1. On a run-rate basis (Q2 net income x 4), the company's return on invested capital is a stellar 109%.

With sales and earnings growing at a 100% annual pace, this stock doesn't look outrageously expensive at 73x run-rate earnings. For investors interested in learning more about the company, the Fool's active VISX message board includes insightful input from both doctors and patients.


Razor blades and batteries maker Gillette (NYSE: G) marched up $1 7/8 to $46 5/7 following its Q2 earnings report. While EPS of $0.26 was down $0.07 year-over-year and in line with analysts' lowered expectations, investors were heartened by a 3.8% rise in sales to $2.41 billion, which was twice the rate analysts had been expecting. Backing out currency effects and the divestiture of its Jafra Cosmetics International, Gillette's quarterly sales were up an impressive 9%.

Broadband access equipment company Efficient Networks (Nasdaq: EFNT) added $13 to $64 1/8 in the company's second day of trading. The shares soared yesterday after the company sold 4 million stubs to the public for $15 each.

Internet-based electronic government services company National Information Consortium (Nasdaq: EGOV) also continued to rise in its second day of trading, moving up $2 15/16 to $20 1/4. Yesterday, the company sold 13 million shares to the public for $12 each.

Enterprise application testing company Mercury Interactive (Nasdaq: MERQ) rose $6 3/4 to $43 1/4 after turning in Q2 EPS of $0.18, better than last year's dime profit and $0.02 ahead of estimates. The company named Amnon Landan, a company co-founder, its chairman, replacing Aryeh Finegold, who also helped start Mercury.

Real-time e-commerce transaction services firm CyberSource Corp. (Nasdaq: CYBS) rose $4 7/16 to $37 23/4 after Business Week's "Inside Wall Street" column said the company was likely to become a takeover target. Gene Marcial's famous unnamed New York money manager said Visa or another credit card company might be a likely buyer. Corporate travel management services company Navigant International (Nasdaq: FLYR), meanwhile, ascended $1/2 to $9 7/16 after Corsair Capital Partners' Jay Petschek told the column he believed Navigant was in talks about deals with several Internet portals.

Pipeline company Kinder Morgan Energy Partners, L.P. (NYSE: ENP) moved up $2 9/16 to $40 1/16 after reporting Q2 EPS of $0.61, up from $0.50 a year ago and a nickel better than the Zacks mean estimate. Revenues totaled $102.9 million, up 25% from a year ago. Merger mate KN Energy (NYSE: KNE) rose $1 1/4 to $21 11/16 following upgrades from Banc of America Securities and Salomon Smith Barney this morning.

Canadian land drilling and oilfield services firm Precision Drilling Corp. (NYSE: PDS) picked up $1 3/8 to $23 5/8 after cleaning house and announcing an entirely new board of directors. The company also said a new chairman and CEO has been appointed at recent tender offer target Computalog Ltd. (Nasdaq: CLTDF). Computalog rose $11/16 to $8 11/16 on the news.

Semiconductor test handling equipment maker Cohu Inc. (Nasdaq: COHU) gained $5 1/16 to $44 as the company reported Q2 EPS of $0.48, down from last year's $0.53 but well ahead of First Call's $0.24 two-analyst consensus. The company said William Ivans, chairman since 1983, died in a glider accident Tuesday. President and CEO Charles Schwan will succeed him.

Fibre channel-based storage technologies developer Ancor Communications (Nasdaq: ANCR), which said it planned to sell 2.5 million shares of company stock for working capital and general corporate purposes, moved up $3 3/8 to $32 3/16.

Earnings Movers

Eclipse Surgical Technologies (Nasdaq: ESTI) up $1 3/4 to $13 9/16; Q2 EPS loss of $0.15 vs. loss of $0.47 last year; estimate: loss of $0.18

Veritas Software (Nasdaq: VRTS) up $6 7/8 to $60 3/16; Q2 EPS $0.16 vs. $0.08 last year; estimate: $0.14


Discount broker Charles Schwab (NYSE: SCH) traded down $2 9/16 to $52 13/16 after reporting Q2 EPS of $0.18, doubling last year's $0.09 and coming in a penny ahead of the First Call mean estimate. Net profit margins increased to 15.4% from 12% a year ago, but the company cautioned that its margins will fall back to historical levels in the coming quarters as it invests in its people, its technology, and its brand name.

Disk drive maker and bad news broken record Seagate Technology (NYSE: SEG) slumped $3 1/2 to $26 1/2 after posting fiscal Q4 EPS of $0.30, excluding unusual items. That was up from $0.09 a year ago but short of analysts' expectations of $0.34 a share and the company's recently lowered guidance of $0.32 to $0.37. In a conference call, Seagate reportedly said it would be "very difficult" to be profitable during the current quarter due to heavy discounting in disk-drive prices, adding that it could break even in fiscal Q2.

Medical tissue cohesive products maker Closure Medical Corp. (Nasdaq: CLSR) lost $10 7/8 to $17 3/8 after saying second-half EPS will be below analysts' expectations because Johnson & Johnson's (NYSE: JNJ) Ethicon unit has cut its orders for Closure's Dermabond wound glue for the remainder of the year due to excess inventory. The company broke even in Q2, better than last year's $0.17 per share loss and in line with market projections.

Private label contract apparel manufacturer Tarrant Apparel Group (Nasdaq: TAGS) was torn for a loss of $2 1/8 to $17 15/16 after saying it expects Q2 EPS of between $0.30 and $0.33, well below Wall Street's $0.54 consensus estimate. The company further believes full-year EPS will be approximately $1.70, missing the market's $1.99 projection and a penny worse than last year, primarily because of lower sales to departments of The Limited (NYSE: LTD).

Nonlaser vision treatment company KeraVision (Nasdaq: KERA) blurred $3 3/16 to $19 3/16 on dilution fears after saying it has filed to sell 4 million shares of company stock, which would boost the total outstanding more than 28%. The company also reported a Q2 loss of $0.45 per share, better than last year's $0.65 per share loss and $0.04 ahead of First Call's four-analyst consensus estimate.

Healthcare products company American Home Products (NYSE: AHP) retreated $1 3/16 to $53 11/16 this morning. The company announced in conjunction with the Centers for Disease Control and Prevention that they are recommending suspending use of the company's RotaShield vaccine for infants. The decision came in response to questions raised by reports of bowel obstruction in 20 infants immunized with the vaccine.

Bike maker Cannondale Corp. (Nasdaq: BIKE) braked $3/4 to $10 1/4 after warning that it expects earnings for its fiscal Q4 ended July 3 to be around $0.10 a share, substantially below analysts' mean estimate of $0.28. Results were hurt by "equipment problems at the company's manufacturing facility related to the introduction of model year 2000 products that hindered its ability to produce sufficient quantities to fill orders."

Troubled cellular telephone company Iridium (Nasdaq: IRID) retreated $1/32 to $7 7/32 as the company invoked a 30-day grace period so it wouldn't miss a $90 million interest payment on its $1.45 billion in bonds. In other news, investor Lockheed Martin (NYSE: LMT) reportedly said it won't put any more money into Iridium.

Electronics contract designer and manufacturer Plexus Corp. (Nasdaq: PLXS) shed $4 1/4 to $29 5/8 after saying fiscal Q3 EPS was $0.39, a penny off Wall Street's consensus projection. Plexus also said it agreed to buy an Illinois circuitry products manufacturing facility from Shure Inc., one of its customers. Plexus will build circuit boards at the facility for Shure's wireless and digital signal processing products.

Property and casualty insurer Horace Mann Educators Corp. (NYSE: HMN) fell $3 13/16 to $25 1/8 after announcing that Q2 EPS is expected to come in at approximately $0.34, well off Wall Street's $0.50 consensus. Catastrophe losses were unusually heavy during the quarter, while higher-than-expected noncatastrophe property and automobile claims also hurt results.

Industrial gases company Air Products & Chemicals (NYSE: APD) leaked $3 15/16 to $37 3/8 after directing investors toward fiscal Q3 EPS of $0.48 before a $0.04 per share workforce reduction charge, missing the market's $0.13 mean estimate. For the year, the company is expecting EPS to come in 5% to 7% below last year's operating figure of $2.22.

Office products superstore operator Office Depot (NYSE: ODP) was shredded $1 3/16 to $19 1/8 after posting Q2 EPS of $0.21, up from last year's $0.17 and in line with the Zacks mean estimate. The company said that although it faces challenges in the second half, it believes its financial goals are "achievable." Merrill Lynch is not so sure and lowered the firm's near-term rating to "accumulate" from "buy."

Earnings Movers

Iomega (NYSE: IOM) down $1/16 to $4 5/8; Q2 EPS loss of $0.07 (before charges) vs. loss of $0.13 last year; estimate: loss of $0.03

Security Dynamics Technologies (Nasdaq: SDTI) down $3 5/16 to $20 11/16; Q2 EPS $0.15 vs. $0.15 last year; estimate: $0.15


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