Alcon Makes Traders Cry

If you're going to carry an above-average valuation, you've got to produce ever-better results and not disappoint anyone. Or else.

That lesson is getting driven home yet again today as leading eye-care company Alcon (NYSE: ACL  ) takes a pounding in the market, thanks to negative investor reaction to disappointing guidance.

Revenue in the fourth quarter climbed almost 11% (13% in constant currency terms) on solid sales in the professional businesses. Pharmaceutical sales rose more than 14%, helped by strength in glaucoma and allergy treatments, and surgical sales climbed nearly 11%, boosted by strong intraocular-lens revenue, but consumer sales increased only 2.2% as contact lens solution sales dropped by nearly 3%.

Alcon was already a highly profitable medical company, but it managed to do even better again this quarter. The gross margin jumped about 4 full points, and operating income, adjusted for litigation and property damage, rose nearly 40% from last year's fourth quarter. Cash flow growth was less strong but still solid -- free cash flow was up 19% from last year -- and return on invested capital is still exceptional.

Unfortunately, there's the matter of that guidance to attend to. Management pegged both revenue and earnings at a level below the pre-existing analyst averages for the next year. Perhaps some of that is due to delays in new products such as Patanase and Retaane, but whatever the case may be, the market is still in something of a "shoot first, ask later" mood.

Alcon is a truly impressive company -- whether you compare it with other eye-care specialists such as Allergan (NYSE: AGN  ) , Bausch & Lomb (NYSE: BOL  ) , and Advanced MedicalOptics (NYSE: EYE  ) or more broadly across the wider pharmaceutical and medical-device world. The bad news is that even with today's drop, it still carries a valuation that seems well out of line, even with what I think are aggressive cash flow growth assumptions. This would be a great stock at the right price, but that's not today's price.

Turn your eye toward more Foolish thoughts:

• Take a Good, Long Look at Cooper
• AMO Focuses on the Giants
• Wide Eyes at Alcon

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).