FOOL PLATE SPECIAL
An Investment Opinion
The Changing Face of VISX
By
Brian Graney (TMF Panic)
February 23, 2000
Refusing to close its eyes to the reality that its competitive market position is changing for the worse, laser vision correction systems maker VISX Inc. (Nasdaq: VISX) late yesterday announced what it termed an "aggressive program" to make its eye correction procedures more affordable to vision-impaired consumers. What specifically caught the market's eye was the company's decision to reduce the per-procedure royalty it receives from customers using its technology to $100 from $250. While good news for consumers, the price cut was viewed as bad news for VISX, which dropped some 25% this morning to a new 52-week low.
The market reacted in various ways to the news, which was not wholly unexpected.
Rival Summit Technology (Nasdaq: BEAM) followed VISX downward with a big loss of its own today as investors feared that falling prices will end up hurting the margins of all laser vision correction systems makers. Meanwhile, vision correction centers operator LCA-Vision (Nasdaq: LCAV) gained ground, mostly because its business is less of a margin story and is more dependent on the overall acceptance of laser vision correction and relative procedure growth. Analysts were quick to issue their opinions, with Dain Rauscher Wessels calling the price cut "shocking" and Lehman Brothers chiming in that VISX had done the "unthinkable."
What was really unthinkable, however, was that the well-recorded two-year value explosion in VISX could continue ad infinitum without a hitch. From the market's point of view, much of the bad news that VISX's competitive positioning in the market was coming under assault had already been priced into the stock. Prior to today's shellacking, the company's shares had dropped nearly 80% from their highs last July as VISX first suffered setbacks on the patent protection front and then reported a sequential Q4 revenue slide. At its current price, VISX is trading at a little under 13 times last year's EPS of $1.35, a far cry from its 110x trailing multiple at its height last summer.
While it is tempting to think of VISX's slide as simply an instance of rapid multiple contraction for a market darling that got too ahead of itself, such reasoning would be simplifying matters a great deal. Rather, investors should take away the lesson of how important a perceived competitive advantage period, or CAP, is to a company's valuation.
Ideally, investors should be looking for long competitive advantage periods, or what Warren Buffett has referred to as companies that have moats around their businesses that are wide, deep, and full of alligators. When the CAP is viewed as sustainable or, better yet, growing over time, companies will be rewarded with higher valuations. When the CAP is evaporating, as it is for a company like VISX, the valuation can head south in a hurry. Sure, future cash flows at VISX are under the gun, too. That is also playing a role in company's slide. But the effect of the changing CAP is where investors looking at VISX should focus their attention right now.
"The United States market for laser vision correction has reached a critical juncture," VISX chairman and CEO Mark Logan said in yesterday's press release. So too have long-time VISX investors. Obviously, the old models that had lent support to a purchase of VISX in the past have now lost a great deal of their prior relevancy. Coming up with new models will be a challenge, but it's a situation that all long-term investors should expect to encounter at some point with all of their holdings. For an investment in VISX at these levels to pay off handsomely down the road, investors must now see something in the company that the conventional wisdom is missing.
Related Links:
See Also