Shares of Advanced Medical Optics
The product recall stemmed from issues with the sterility of the product in the manufacturing process, not any problems with the formulation of the product itself. Its problems can be solved with a thorough cleansing and sanitizing of the product's Chinese manufacturing plants. During the plants' 10-to-12-week shutdown for cleaning, AMO will take the opportunity to also perform previously announced capacity expansions. Those upgrades where scheduled for 2007, but it makes sense to perform them now, to limit further disruptions in the plants' manufacturing processes.
AMO's eye-care products accounted for $209 million, or 28% of sales, in the first nine months of this year. Its Asian operations (which were primarily supplied by the China manufacturing plants) accounted for 38% of eye-care sales. AMO's other contact-lens solution plant in Spain will continue running, but it won't be able to expand its output to account for the Chinese plant shutdowns, since it's already operating at full capacity.
According to AMO's estimates, sales in the fourth quarter and first half of 2007 will be reduced by $40 million to $50 million. The recall will also drive the cost of goods sold and SG&A expenses $35 million to $40 million higher. As a result, AMO downgraded its adjusted earnings expectations for 2006 by approximately 30%. It's now guiding between $1.30 and $1.40 per share, with 2007 earnings in the range of $1.85 to $2.00 a share (about 16% lower than 2006's original estimates).
Fortunately, there have been only a few instances of eye irritation as a result of the bad contact lens solution, with no cases seen in the U.S. or Europe. AMO probably won't be facing any major liability caused by lawsuits from the product recall. If product recalls prove to be only transitory in nature, they can often be great times to pick up shares at a welcome discount. For potential shareholders of AMO, this might be one of those instances. Earnings in 2008 and beyond won't be affected by this event, and they should be much better going forward.
Open your eyes to further Foolishness:
- Advanced Medical Optics Still a Little Bloodshot
- An Eye-Opening Quarter at Alcon
- Foolish Forecast: Lousy View for TLC Vision
Keep an eye out for market opportunities with help from our selection of Foolish newsletters. Try any of our services free for 30 days.