Well, it finally happened. LCA-Vision
With revenues of just $78.7 million (hampered by 5% same-store sales growth), and earnings of only $0.54 per share, the firm disappointed the Street in just about every way imaginable. The real surprise, I think, is that the stock was only punished with a 6% decline in price (of which it's already recovered 2%, no less).
Perhaps the reason investors didn't chastise the stock more severely is that LCA-Vision promised to get itself back on track, and meet its earlier promise for annual profits, last week's earnings miss notwithstanding. According to management, the firm continues to expect 2007 sales to top out somewhere between $308 million and $321 million, and for profits to range from $2.05 per share to $2.15 per share.
Look a little deeper
The rote recitation of GAAP results out of the way, let's now shine the light a bit deeper and examine two larger trends at LCA -- one good, one bad. Good news first: According to the report, LCA increased the numbers of procedures it performed by 11% year over year. CEO Steven Straus pointed out that this was accomplished in the context of "an industry where procedure volume has been flat-to-down for the past six quarters."
What's that mean to investors? Simple: LCA is stealing market share from its private practice rivals. That's the only way for LCA to grow its number of procedures performed, while the industry-wide total is flat. (By the way, that "someone else" is not TLCVision
The bad news
Unfortunately, if expectedly, this growth is coming at a cost. To grow its sales 18%, LCA had to increase its marketing and advertising budget 51% in comparison with Q1 2006, even as the firm held every other line item of operating costs to lower than the rate of sales growth. Seems to me the company has come down with a serious case of "diminishing returns." Meanwhile, TLC, which grew its sales just 7% last quarter, had to up its own advertising spending by 21% to accomplish this.
Is there a doctor in the house? Seems to me these diminishing returns are contagious.
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