STAA - STAAR Surgical Shines In Today's Uncertainties Due To Growing U.S. Revenue

Summary

• Despite facing headwinds in China, STAAR Surgical Company was able to boast growing revenues in Q4 2022. It enjoyed growing revenues in all of its key geographic markets.
• It enjoyed growing revenues in all of its key geographic markets.
• This was largely due to the positive adoption of its innovative EVO ICL, which is actively used by over 1,200 surgeons in China and over 600 in the U.S.
• It was also able to boast a growing margin despite the challenging operating environment.
• With its improving profitability and stable balance sheet, STAAR Surgical Company is a good 'buy on fear' candidate.

STAAR Surgical Company (NASDAQ:STAA) is one of the leading medical technology company that focuses on treating impaired vision. It manufactures and sells implantable lenses for the eye and is well known for its EVO Visian ICL. The USFDA recently approved STAAR Surgical's Evolution in Visual Freedom ((EVO)) Visian implantable Collamer lenses ((ICL)), bringing a novel treatment option to an estimated 100 million U.S. individuals with myopia. This has enabled the commercialization of the EVO lens to start in the U.S. EVO ICL is a type of implantable lens that is inserted into the eye to correct vision without the removal of corneal tissue, as opposed to LASIK and PRK, which entails removing tissue from the cornea. This is a game-changing innovation in the field of refractive surgery.

As a result, STAA's domestic sales have increased significantly, resulting in total sales outside of the U.S. being down to 95%. In fact, the management claims that they saw substantial growth in the U.S. market, especially in Q4'22 when there was a 600% increase (YoY) in Doctor Finder visits. According to the management, positive momentum will continue in FY'23, as they are ramping up their R&D and advertising initiatives. This makes the company appealing and is well-positioned in the rapidly expanding global implantable contact lens market.

In fact, according to the management, they are still positive about overall key market's demand environment, particularly in China where they expect a peak summer implant season for ICL procedures. The double-digit growth of 26% (YoY) in ICL net revenue outlook in FY'23 is also impressive, especially considering the current inflationary environment and stoppage of support of its non-core cataract IOL. It is worth noting that STAA remains fundamentally liquid and has no long-term debt on its balance sheet . To sum it up, STAAR Surgical Company stock is a buy in today's weakness.

Company Overview

STAAR Surgical Company reported a strong top line revenue increase of $284.4 million at the end of FY'22, up 23.40% from $230.5 million in FY'21. This is due to consistent growth in all of its key markets. Domestic revenue (U.S.) increased by 45.4% over the previous year, China by 38.0%, Japan by 5.2%, and other international markets by 8.9%. A big chunk of STAA's total revenue comes from the Asian market (52% derived from China), where the company is well-established. It is expected that the Asian market, including China, will continue to experience economic recovery this 2023 . This gives STAA opportunity to expand in the current macro uncertainties.

According to the management, China continues to show signs of recovery from the Covid-19 pandemic, as quoted below.

Our local team certainly has expressed confidence in terms of what's happening at the street level with China. We're not seeing COVID testing. There are no travel restrictions. We're seeing more normal refractive procedures being done at the eye clinic. Source: Q4'22 Earnings Call Transcript .

This reassures investors that the headwinds from the Chinese market and the other headwinds mentioned below, which led to a 0.59% year-over-year slowdown in its total global refractive procedures, are transitional.

During the fourth quarter, refractive procedures, including EVO in China were impacted by COVID. First, beginning with the change in consumer behavior that STAAR called out on the November 2, 2022 earnings call. Later, protests and the lifting of the country's COVID Zero policy follow. Then a subsequent rise in COVID infections further impacted the level of refractive procedures in the fourth quarter. Against these operating backdrop, we are proud to deliver 18% ICL unit growth in China for the fourth quarter of 2022. Source: Q4'22 Earnings Call Transcript

Furthermore, STAA has more than 1,200 surgeons in China who are presently using its product and more than 600 surgeons in the US who are authorized to implant EVO lenses, supporting its growing ICL revenue projection of $340 million for FY'23.

On top of its growing top line, STAA enjoys growing margin, as shown in the image below.

STAA also continues to improve its operating efficiency by focusing on its core business (ICLs) and will no longer support its IOL business after 2023, as management sees it as a low-margin business.

...our low-margin other products business, which represents approximately 5% of sales and consists of cataract IOLs, IOL injectors and injector parts, has faced increasing supply chain challenges. Source: Q3'22 Earnings Call Transcript .

This will help STAA navigate next year with continued growth in margins. It makes sense that at these levels, there are positive insider trading activities.

Approaching Near Support

STAA is one of many companies that have suffered badly following the recent market sell-off in the past few days. It was rejected after attempting to trade above its 200-day simple moving average. In fact, it is now trading below its 20-day simple moving average, implying significant bearish momentum. STAA is already trading inside a significant support zone between $54 and $63. Even though MACD is still signaling bullish momentum, today's price action weakness might cause prices to fall further. Further consolidation in this zone could disrupt today's bearish momentum and possibly trigger a pivot in favor of bullish momentum. As a result, it is wise to keep an eye on this stock.

Trading At A High Multiple, But...

STAA stock is now cheaper than it was historically after a steep decline from its peak in 2021. The following valuation multiples suggest that the company is really trading cheaply based on its forward (Non-GAAP) P/E of 50.56x compared to its 5-year average of 137.45x and its forward EV/EBITA of 40.18x compared to its 5-year average of 199.03x. Looking at its growing earnings per share of $0.81 and key market stabilization, I believe STAA is trading cheaply as of this writing. However, a high concentration of exposure to China remains a key risk for the company, especially in light of its recent issues, which could affect the relationship between China and U.S.

Conclusive Thoughts

STAAR Surgical Company's improving profitability is shown in its growing earnings per share. It has a strong focus on its U.S. operations, and according to the management, they will expand their workforce in the U.S., which will help to further penetrate the U.S. market and facilitate growth. This is very timely since the FDA is reviewing a new policy requiring medical professionals to inform patients of possible LASIK side effects . Hence, this could potentially boost the U.S. ICL revenue of STAAR Surgical Company.

Additionally, STAAR Surgical Company ended FY'22 with improving liquidity, as shown by its current ratio of 6.03x, which is better than its 3-year average of 5.29x. Moreover, the company has a huge total addressable market ((TAM)), as shown in the image above. These factors make STAAR Surgical Company attractive on a long-term horizon, making it a good 'buy on fear' candidate.

Thanks for reading and good luck!

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