With STAAR Surgical (STAA -1.95%) shares down more than 50% in the past six months, stockholders are in sore need of some good news. Despite the company's decent pace of revenue and earnings growth and minimal debt, shareholders may not have much to look forward to right now from this maker of implantable lenses for vision correction.
That's quite a change. Over the past five years, STAAR has been a great investment with its shares still up more than 700%. How could a stock that flew so high be struggling so much? And is it worth buying while its shares are down from their heights? Let's take a look at what's going right and what's going wrong to find out.
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Business is stronger than ever
STAAR Surgical sells implantable lenses that take the place of eyeglasses or contact lenses. If you're habitually frustrated by your glasses getting smudged by an errant fingertip like I am, their product might be right up your alley. And that's just one reason why the company has trailing 12-month revenue in excess of $217 million.
The lenses can correct a bevy of ubiquitous vision issues like myopia and astigmatism, thereby competing in a global market that's worth as much as $64 billion per year, according to the research group Market Scope. Plus, they're upgradeable, and some people may find them to be more convenient than the vision correction provided by contact lenses or eyeglasses as there's no need for habitual lens cleaning or disinfection.
The main appeal of STAAR's stock is that the company is expanding quite reliably without doing anything beyond its normal course of operations. Over the past five years, its annual sales have grown at a compound annual rate (CAGR) of 25%. Quarterly earnings and free cash flow (FCF) have also burgeoned.
STAA Revenue (Quarterly) data by YCharts
In fact, business has been so good that in the third quarter of 2021, demand outstripped the company's inventory and ability to generate new supply. So STAAR recently decided to double the manufacturing footprint of its main facility to ensure that it can keep serving higher and higher levels of demand from its major markets like China and the U.S.
To cap it off, it has a 9% share of the global market for implantable Collamer lenses. In China, STAAR holds a 20% share of the market as of 2020, up from a mere 2% in 2015. To say that the company is rapidly becoming established in its markets would be an understatement, and there's nothing in its way which would prevent it from gobbling up even more of the pie.
But valuation remains too high
I'm a big believer in the merits of STAAR's business, and I think it'll continue to be a successful company moving forward. But as an investor, I wouldn't touch this stock at the moment because its valuation is still incredibly bloated. Right now, its trailing price-to-earnings (P/E) ratio rests at around 153. In contrast, the medical instruments and supplies industry has an average P/E ratio of merely 53. So you'd be paying nearly three times as much per dollar of earnings if you bought STAAR's stock.
With no catalysts for rapid growth in sight, that's a risky proposition. Even the stock's forward P/E ratio of 75 is significantly above the average. That's a particular problem in current market conditions where high-flying growth stocks like STAAR are tumbling left and right.
Should investors transition back to growth stocks, there'll be an opportunity for STAAR to rise once again. Until then, however, it could yet have a longer way to fall. So even if you think this company will keep executing successfully over time, it's probably a good idea to steer clear for now. Once the dust of the current correction settles, the conditions to buy it could be more favorable.
