With a $369 million market cap, STAAR Surgical Company (STAA) is firmly in the small-cap category. But this isn’t a profitless pharmaceutical whose fate hinges on FDA approval — Staar makes money, as evidenced by its earnings announcement on Tuesday. The stock fell yesterday morning in the wake of the announcement, but has already largely recovered, thanks in part to inspiring guidance, as Canaccord Genuity Research’s Jason Mills explains below. Staar makes implantable ocular lenses to correct conditions like cataracts and myopia.
“STAAR Surgical Company (STAA) — We reiterate our BUY rating and $14.50 price target following bullish 2012 guidance, which leads us to increase our ICL [implantable collamer lens, a Staar product] sales and gross margin estimates in 2012, 2013 and 2014.
“Q4 results were solid where it counts, as we believe the quarter’s negatives — i.e., lower ‘other’ revenue and higher non-recurring manufacturing expenses — pale in importance to the positives — i.e., ICL sales (up 37% year over year; up 32% in 2011) and gross margin (record 69.8% in Q4 vs. our 69.1% estimate; 2012 guidance of 71.0% vs. our 70.4% estimate). We believe ICL growth and gross margin (GM) expansion are the two most important drivers of revenue/EPS growth over the next three years, during which we model over 15%/90% CAGR, respectively.
Investment highlights
“Revenue of $16.4 million (up 14% year over year) was slightly below our $16.7 million estimate and $17.1 million consensus. As pre-announced, ICL revenue was strong ($9 million; up 37% year over year). IOL [intra-ocular lens] sales of $6.8 million were in line with our $6.9 million, while the ‘Other’ revenue line was $300 thousand light, owing to a move from distributorship to direct sales in Australia.
“Pro forma operating income of $1.2 million met our estimate on strong GM (69.8% vs. 69.1% estimated). Breakeven GAAP EPS was a bit lower than our one cent estimate owing to higher manufacturing consolidation expenses (MCE) and higher tax rate. We favor the ‘pulling forward’ of the MCE, as it could accelerate long-term cost reduction and tax breaks, both of which we expect to positively impact EPS in 2014.
“2012 guidance calls for revenue growth of 15%, ICL growth of over 32% and expanded GM and profitability each quarter, all of which are in line with our assumptions, with the ICL guidance above our thinking.
Valuation
“We project STAAR Surgical will be one of just a few companies that deliver 15%-plus top-line growth in med-tech over the next few years. We estimate there are fewer than a dozen companies with this kind of revenue growth profile over the next two years. According to our valuation analysis, this ‘high-growth med-tech comp group’ is currently afforded a mean (excluding outliers) EV/sales multiple of 6.3 times 2011 revenues. If STAA is able to achieve our estimates, the stock deserves a multiple commensurate to this rarified group, in our view. In sum, we assign a 6-times EV/sales multiple to 2014 estimated revenue of $100 million, discounted back two years at 6.5%, to reach our $14.50 year-end target.
“We also note that the company has approximately $128 million worth of net operating loss carry-forwards, which equates to approximately $3.50 per share. If we were to include this asset, we could use a target multiple of 4.5 times (i.e., 30% discount to the ‘high growth’ med-tech comp group) to get to our $14.50 price target.”
- Jason R. Mills, Canaccord Genuity Research, March 7, 2012