TLC Vision (NASDAQ:TLCV) reports its Q4 and full-year 2005 earnings tomorrow. Will investors receive its numbers with tender loving care, or will they give the stock the boot? Whichever way it goes, here are the facts you'll need to evaluate whether Mr. Market's reaction is correct.

Wall Street Wisdom:

  • General consensus. Six analysts follow TLC, which receives five hold ratings from this group and one sell.
  • Revenues. Quarterly sales are expected to rise 9% to $60.7 million.
  • Earnings. Profits are expected to fall by half -- down from $0.02 to $0.01 per share.

Margin watch:
Cover your left eye, or maybe your right -- whichever eye it is you use to look at the net margin line, cover it for a moment. Focus instead on the rolling gross margin: Although it's higher now that it was 18 months ago, it has been falling for three straight quarters. Focus also on the operating margin, which has fallen for four straight quarters and is lower today than it was 18 months ago.

See the trend, commit it to memory, and then look at the net margins. Yes, they look super now, but that's not what the rest of the business has been telling you. TLC's rolling net looks so good because in the December 2004 quarter, the company recorded a $26 million one-time gain -- equal to about all the net profits it booked in the other five quarters combined. Don't expect that to happen again any time soon.

Margins %

6/04

9/04

12/04

3/05

6/05

9/05

Gross

29.7

30.8

31.6

32.2

31.9

31.8

Op.

8.0

10.8

11.2

10.6

8.8

6.7

Net

3.2

6.1

18.0

18.2

17.8

17.1
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ending in the named months.

Foolish lookout:
Over the past three quarters, TLC generated $12.4 million worth of positive free cash flow. Good? Not really, when you consider that by this time one year ago, it had generated trailing free cash flow of $25.5 million. Don't be fooled by the company's deceptively low P/E of 11 -- it's predicated on that Q4 2004 one-time benefit. On a price-to-free cash flow basis, TLC is trading at 37 times trailing free cash flow. Compared to an analyst-projected earnings growth rate of just 10%, this company looks richly valued.

Unless the company can get its cash flow spigots turned back on, this stock doesn't deserve your love.

Competitors:
These include NovaMed (NASDAQ:NOVA) and LCA-Vision (NASDAQ:LCAV). You can read all about the latter's recent earnings report in Stephen Simpson's write-up, right here.

Fool contributor Rich Smith has no interest, short or long, in any company named above.