STAA - STAAR Surgical: Not In My Sight Yet

2023-10-24 12:28:24 ET

Summary

• STAAR Surgical Company has developed the EVO ICL Lens to treat nearsightedness, offering clear vision without the hassle of contact lenses or glasses.
• The EVO ICL Lens has gained market share, with the EVO category capturing over 10% of the global market.
• STAAR's sales and operating profits have been growing steadily, with a net cash position and a valuation of $2.5 billion. However, sales growth is slowing down.

Shares of STAAR Surgical Company ( STAA ) have fallen precipitously, down 70% from the 2021 momentum-driven highs, which were far too high, of course, with the benefit of hindsight. Shares now trade at the lowest levels since the start of the pandemic as revenue growth is slowing down dramatically. This is despite the positioning of STAAR as a secular growth play, which unexpectedly has come down, in fact sales growth has come to a standstill here.

On top of the top line growth slowdown, STAAR is seeing real margin pressure as well, which means that earnings power is not able to provide fundamental support yet, even with shares down 70% from their highs. This makes me cautious to get involved as I do not entirely understand where the rapid growth slowdown comes from.

All About Vision

STAAR has developed the so-called EVO ICL Lens (also known as EVO) to help consumers get rid of hassles of contact lenses and glasses. The procedure and lens is designed to treat nearsightedness with an implantable Collamer Lens, made out of soft and flexible structures.

The procedure comes with benefits not offered by other treatment solutions, as it brings sharp and clear sight, but avoids the (potential) pitfall of dry eyes and brings harmony with the natural eye, as the surgical procedure is relatively small and short, only lasting 20 to 30 minutes.

The potential is huge as some 2 billion people across the globe are struggling with their vision, as there are some 6 million lens wearers dropouts in the U.S., every year. The EVO ICL lens has gradually taken market share in recent years, now taking over 10% of the global market.

The company was founded in the early 1980s and went public in the early 1990s, as the business had seen tough times for a long period of time. Shares traded in the low single digits in the 1990s and 2000s.

The share price started accelerating from 2018 onwards as shares traded in their $30s pre-pandemic, to a peak at $150 in 2021, after which shares have seen a steady and huge pullback to $41 at the moment of writing.

Establishing A Base

As mentioned above, shares of STAAR really came to life from 2018 onwards, a year in with it generated $124 million sales on which GAAP operating profits of $6.6 million were reported. What followed was a period of strong sales growth as earlier this year, the company reported a 23% increase in 2022 sales to $284 million, nearly all generated from ICL sales. Operating earnings rose by 31% to $43.8 million, translating into decent margins of 15%. Net earnings were reported at $38.8 million, equal to $0.78 per share following some interest income and a lower tax rates.

The 50 million shares traded at $50 at the start of 2023, granting the company a $2.5 billion equity valuation, a valuation which includes a $225 million net cash position. This implies that the business traded at around 8 times sales, after shares were down two thirds from a momentum driven peak in 2021. At these levels, STAAR still commands a premium valuation, but this comes as the business is solidly profitable and posts decent top line sales growth.

The company guided for continuation of solid growth, seeing 2023 ICL sales at $340 million. In May, STAAR posted first quarter sales of $73.5 million, up 16% on the year before. The issue is that GAAP operating profits of $2.8 million were evaporating to 4% of sales, amidst a big increase in the cost base, seen across general & administrative costs, selling & marketing costs, and higher R&D expenses. ICL sales were now seen at $345 million and with $3 million in other revenues, total sales are seen at $348 million for this year.

Second quarter sales were reported up 14% to $92.3 million as margins were again under pressure, this quarter coming in at 9.3% of sales. With revenues reported at $165.8 million so far this year, the issue is that the full-year ICL guidance was cut to $320-$325 million, suggesting flattish sales for the remainder of the year, as slower topline sales growth undoubtedly has (further) implications on the bottom line.

And Now?

The nearly 50 million shares of STAAR grant the company a $2.0 billion equity valuation at $41 per share here, including a $209 million net cash position. Based on the revised sales guidance, the multiple has fallen to less than 6 times sales, which start looks like a very reasonable sales multiples for a medtech business which is solidly profitable and posts earnings growth.

The issue is, however, that growth is rapidly slowing down, but moreover, that the sales in the second half of the year are seen flattish compared to the sales seen in the first half of the year. In fact, sales are seen down from the second quarter run rate.

This suggests that flattish sales will be seen for some quarters to come, all while GAAP earnings trend at just $0.30-$0.40 per share here, or perhaps ten cents higher if we accept the reconciliation items (other than stock-based compensation expenses).

That is no issue if the company continues to show solid growth, and while the long term growth prospects remain good, the company has seen a rapid slowdown in the pace of growth (with no growth seen in the near term). Quite frankly, we are looking for answers on the question of why growth has slowed down.

Given this, with no real explanation provided yet for the rapid growth slowdown, I am a bit cautious to get involved here with STAAR Surgical Company. Despite a massive re-rating, valuations are still quite (and too) demanding, certainly if growth has come to a (near) standstill.

For further details see: