On May 22, cosmetic surgery products maker Mentor (NYSE:MNT) will announce earnings for the fourth quarter of fiscal year 2006 and all of fiscal year 2006.

What analysts say:

  • Buy, sell, or waffle? Three rate this as a buy, one a sell, and two would have you hold.
  • Revenues. They were flat year over year for the quarter at $131.9 million, but there was a 3.8% increase for the whole year at $502 million.
  • Earnings. Estimates are for $0.40 EPS for the fourth quarter and $1.46 EPS for the year overall.

What management says:
In the last earnings release, Joshua H. Levine, president and CEO, said, "Our third-quarter results were affected by transitory factors and temporal disruptions related to Mentor's ongoing strategic initiatives and the continuing FDA review of our silicone gel PMA. While we strongly believe these activities have the potential to create significant value for Mentor's shareholders, there is uncertainty regarding their timing. Because of a lack of visibility in these areas, we believe it is appropriate to withdraw our full-year financial guidance for fiscal year 2006."

Last July, Mentor received an "approvable letter" from the FDA for its new silicone gel breast implants, but there were conditions attached that are still being resolved. The company doesn't know the timing of this, so management is trying to play it conservatively.

Further, Mentor is planning to sell two of its business segments and focus just on the aesthetic medicine portion, which it believes to have better prospects going forward, regardless of the uncertainty with the FDA at the moment. They made a bid to purchase Medicis Pharmaceutical (NYSE:MRX), maker of dermatology and aesthetic products, but were rejected.

What management does:
While gross margins have actually increased, slowing sales growth must be worrisome to the company. Part of this is from women delaying surgery to see whether the silicone implant approval is finalized or not. Costs while the company explores alternative strategies aimed at taking advantage of the growing aesthetic medicine market have hurt operating and net margins. Short-term pain for hopefully longer-term gain is a fact of life anyone involved in cosmetic surgery is familiar with.

Margins %*

9/04

12/04

3/05

6/05

9/05

12/05

Gross

62.5

63.2

64.1

64.6

65.0

65.4

Operating

19.0

19.8

20.8

21.4

21.5

21.5

Net

12.7

13.1

11.4

12.0

11.8

11.1

Sales Growth %**

16.6

13.2

12.2

10.5

5.1

(0.1)
*Trailing-12-months data for quarter ending in month indicated.
**Year-over-year comparison for quarter ending in month indicated.
All data from relevant company 10-K and 10-Q filings.

One Fool says:
The company is divesting itself of two of its three divisions and focusing on the aesthetic medicine side of its business. Uncertainty about the timing and fulfilling of conditions for FDA approval of its new silicone gel breast implants adds to the skittishness of investors. Both Mentor and Inamed, a subsidiary of Allergan (NASDAQ:AGN), are in the same boat over this. Don't look for any announcements about this in the earnings release, though. Instead, expect discussion to focus on the sale of its surgical urology and consumer health-care segments.

Having withdrawn its guidance for fiscal 2006, analyst projections, while lower than what they were based on previous guidance, could still be off. If the company misses the estimate, I would expect it to miss on the low side, based on the dragging uncertainty about the FDA approval and the various consequences from that. If that happens and the stock price takes a dip, it might be a good time to add to or start a position -- assuming, of course, that you have done your Foolish due diligence.

Competitors:

  • Medicis Pharmaceutical
  • Inamed, a subsidiary of Allergan
  • Johnson & Johnson (NYSE:JNJ)

Fool contributor Jim Mueller owns shares of Johnson & Johnson and Mentor. The Fool has a disclosure policy.