LCA VISION INC LCAV
February 13, 2012 - 9:17am EST by
gocanucks97
2012 2013
Price: 5.20 EPS $0.00 $0.00
Shares Out. (in M): 19 P/E 0.0x 0.0x
Market Cap (in $M): 99 P/FCF 0.0x 0.0x
Net Debt (in $M): 38 EBIT 0 0
TEV ($): 61 TEV/EBIT 0.0x 0.0x

Sign up for free guest access to view investment idea with a 45 days delay.

  • Turnaround
  • medical technology

Description

LCAV:

After the worst industry downturn, LCA Vision is experiencing a turn in the fundamentals and on the cusp of turning profitable again. Pent-up demand, reduced industry capacity, and significant cost cutting have set up the company to reach/exceed prior peak EBIT margins at 15-20%. While the stock has bounced off the bottom (up 150%), it is well below prior peak of $50+. With 40% of market cap in cash and 0.5x forward sales, the stock is essentially a long dated option on the eventual recovery of the laser vision correction market with multi-bagger potential.

Company/Industry Overview: Based in Cincinnati, LCAV is one of the largest providers of LASIK surgeries in US and operates 53 centers (down from 75 in ’08). There are around 60m people in the US who are eligible for laser eye surgeries. The procedure/industry has been around for some time and experienced significant growth in late 90’s before plateauing around 1.25-1.4m procedures/year from 2000 to 2007. The industry is dominated by individual surgeons, while chains make up 20-30% of total procedure volume, with LCAV/TLC Vision being the two largest players, each claiming 13% of market during the peak in ’07.

The average cost per procedure is around $2K. Unlike most other surgeries, most laser vision correction procedures are not covered by insurance and thus paid out of pocket. The big ticket make the procedure as discretionary as it gets, and not surprisingly the industry took a big hit in the recent recession, with volume down 40% from the peak.

Volume in mm's                  
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
1.39 1.35 1.15 1.18 1.28 1.37 1.36 1.37 1.02 0.75 0.74 0.76


Why LCAV now? The industry downturn hit LCAV and TLCV very hard. TLCV in fact filed for bankruptcy in Dec ’09 (since emerged under PE fund ownership). LCAV had its share of issues (over-expansion during the boom years, bad debt, proxy fight). Total procedures performed fell from 192K in ’07 to 57K in ’10. Under a new mgmt team, the company closed 1/3 of its centers, reduced headcount by 54% and cut G&A by 40% since ’07, yet still lost serious money after doing 15%+ EBIT in the previous 4 years. The company only survived by the virtue of its great balance sheet.

After four tough years, procedure volume is finally rebounding, with five straight quarters of positive SSS, 18% SSS growth in Q3 and 33% in Q4 as pre-announced. It is hard to pinpoint exactly what is behind the rebound, but an improving economy is most likely the biggest driver. LCAV is also taking some market share. Since there is no other technology break-through, I do not see any structural reason why the decline in procedures over the last few years is permanent – the benefit is clear, and price was likely the only reason why people chose to defer the procedure. We have seen this movie before after the ’02 recession, when the industry suddenly sprung to life in early ’04 up 30%. There is also some conforming evidence in other types of semi-discretionary surgeries (orthopedic) showing signs of life with fewer people deferring.

During the downturn, LCAV shut 1/3 of its centers. I couldn’t find much information on TLCV since it is no longer public, but it is probably reasonable to assume that it has also closed some under-performing centers during/after the bankruptcy restructuring process. My guess is that the industry probably saw 10-15% reduction in capacity from a peak of 1300 LVC centers in ’07. In the mean time, population has grown a bit, and if normal procedure volume is 1.2m (2% of eligible population, some also estimate 1.2m is the number of new patients who become eligible each year), then we also have built up more than 1 full year of pent-up demand over the last 4 years, much like the same exercise many have gone through for housing and autos. Encouragingly, pricing actually held up pretty well during the downturn, although some of it was likely the result of the mix benefits.

So the setup of the story looks pretty good -- an industry rebounding after a long/deep downturn, a company that is extremely lean, has high operating leverage (incremental gross margin over 65%), and could produce high FCF (low capex, NOL shielding tax).

Numbers:

I am attaching a model with historical data as well as my projections for ’12 and ’13 and “Normal”, which is assuming LCAV has 8% of market share of 1.2m industry volume.

LCAV finished ’11 with 60K procedures. Mgmt has guided that the company will be cashflow positive at 70K volume, while I am actually modeling the company do double digit SSS in ‘12/’13, hit 70k target in ’12 and reach decent profitability in ’13. The company is also testing providing some other ancillary procedures to boost topline and leverage the fixed costs. I am not modeling any of that.

                       
LCA-Vision 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E Normal
                       
Net Patient Service Revenue $127,123 $176,874 $238,925 $292,634 $205,175 $129,213 $99,825 $103,607 $126,167 $141,560 $172,800
Mgmt & other                  -                  -                  -                  -                  -                  -                  -                  -                  -                  -  
     Net operating Revenue 127,123 176,874 238,925 292,634 205,175 129,213 99,825 103,607 126,167 141,560 172,800
                       
Operating Expenses:                      
Medical Prof & License (variable) 24,274 33,500 42,954 49,312 41,797 28,747 24,160 25,225 29,848 32,836  
Direct Costs of Services 40,842 54,952 77,612 97,422 77,548 63,579 46,631 43,236 46,695 49,029  
General and Admin Exp. 10,292 14,021 21,157 22,657 20,265 16,502 13,956 14,218 15,100 16,100  
Marketing and Advertising 20,468 31,812 47,971 66,469 52,429 33,784 24,113 23,249 26,737 28,074  
Depreciation and Amortization 7,046 7,636 8,452 11,210 17,971 14,197 9,408 5,803 5,672 5,438  
Restructuring/Impairment 0 0 0 0 0 0 0 0 0 0  
Other 0 0 0 0 0 0 0 0 0 0  
Total Costs & Exp. 102,922 141,921 198,146 247,070 210,010 156,809 118,268 111,731 124,051 131,476 145,152
Gross Margin $ 62,007 88,422 118,359 145,900 85,830 36,887 29,034 35,146 49,625 59,695  
     Operating Income (EBIT) 24,201 34,953 40,779 45,564 (4,835) (27,596) (18,443) (8,124) 2,116 10,083 27,648
     EBITDA  31,247 42,589 49,231 56,774 13,136 (13,399) (9,035) (2,321) 7,788 15,521 34,560
Interest Expense              (12)              (81) (125) (370) (553) (658) (419) (250) (91) 0  
Interest Income           2,125           3,925 6,231 6,346 (980) 2,386 1,825 804 405 416  
Other Income              262              118 75 0 33 433 0 0 0 0  
     Income (loss) before taxes 26,401 38,828 47,680 51,725 (5,858) (25,312) (17,012) (7,570) 2,430 10,500 34,560
Income Taxes  (benefit)           5,911         15,832 19,310 19,221 (2,050) (8,859) (5,954) (2,649) 850 3,675 12,096
     Net Income  (loss) 20,490 22,996 28,370 32,504 (3,808) (16,453) (11,058) (4,920) 1,579 6,825 22,464
                       
Fully-Taxed Diluted EPS $0.98 $1.07 $1.34 $1.64 ($0.21) ($0.88) ($0.59) ($0.26) $0.08 $0.36 $1.12
FCF/share $1.32 $1.43 $1.74 $2.21 $0.76 ($0.12) ($0.09) $0.05 $0.35 $0.73 $1.63
                       
Average Diluted Shares Outstanding 20,807 21,480 21,212 19,811 18,549 18,593 18,680 18,853 18,970 19,122 20,000
                       
YoY Growth                      
Revenue 56.1% 39.1% 35.1% 22.5% -29.9% -37.0% -22.7% 3.8% 21.8% 12.2%  
EBITDA 131.0% 36.3% 15.6% 15.3% -76.9% -202.0% -32.6% -74.3% -435.5% 99.3%  
                       
Margin Analysis                      
Gross margin (medical prof & direct cost) 48.8% 8.4% 49.5% 49.9% 41.8% 28.5% 29.1% 33.9% 39.3% 42.2%  
Incremental GM 61.0% 0.0% 48.2% 51.3% 68.7% 64.4% 26.7% 161.6% 64.2% 65.4%  
EBITDA 24.6% 24.1% 20.6% 19.4% 6.4% -10.4% -9.1% -2.2% 6.2% 11.0%  
EBIT 19.0% 19.8% 17.1% 15.6% -2.4% -21.4% -18.5% -7.8% 1.7% 7.1% 16.0%
                       
Medical Prof & License 19.1% 18.9% 18.0% 16.9% 20.4% 22.2% 24.2% 24.3% 23.7% 23.2% 20.0%
Direct Costs of Services 32.1% 31.1% 32.5% 33.3% 37.8% 49.2% 46.7% 41.7% 37.0% 34.6% 32.0%
General and Admin Exp. 8.1% 7.9% 8.9% 7.7% 9.9% 12.8% 14.0% 13.7% 12.0% 11.4% 10.0%
Marketing and Advertising 16.1% 18.0% 20.1% 22.7% 25.6% 26.1% 24.2% 22.4% 21.2% 19.8% 18.0%
Depreciation and Amortization 5.5% 4.3% 3.5% 3.8% 8.8% 11.0% 9.4% 5.6% 4.5% 3.8% 4.0%
Tax Rate 22.4% 40.8% 40.5% 37.2% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
                       
Key Metrics                      
Total Centers 44 50 59 72 75 62 54 53 53 53 53
Y/Y Procedure Growth 46.3% 48.2% 30.5% 3.7% -40.1% -36.8% -22.1% 5.1% 20.4% 10.0% 21.7%
Procedure/center 2,178 2 3,140 2,670 1,535 1,174 1,050 1,124 1,353 1,489 1,811
Est. Same-Store Procedure Growth   39.7% 16.0% -7.4% -47.1% -34.6% -10.2% 13.3% 20.0% 10.0%  
                       
Revenue/Procedure $1,326 $1,356 $1,293 $1,546 $1,774 $1,793 $1,759 $1,741 $1,763 $1,798 $1,800
Y/Y Growth 6.7% 2.2% -4.7% 19.6% 14.7% 1.1% -1.9% -1.0% 1.3% 2.0%  
                       
Industry Volume 1,320,000   1,370,000 1,370,000 1,016,000 748,855 737,100 763,500 0 0  
Mkt Share       14.0% 11.3% 9.7% 7.7% 7.8% 8.0% 8.0%  
                       
Operating Costs/Procedure $1,074 #VALUE! $1,070 $1,285 $1,824 $2,155 $2,085 $1,875 $1,729 $1,666  
Marketing $/procedure  $          214  $            -    $          259  $          346  $          455  $          464  $          425  $          390  $          373  $          356  

One may question on whether my margin assumptions are too aggressive. In many ways, I feel LCAV is similar to a trough margin retailer experiencing a turn-around in sales. I have encountered many of these turn-around stories, where the eventual margin/profit progression far exceeds original expectation – most analysts tend to way under-estimate the operating leverage in the model. URGI and KIRK were both VIC ideas that worked out great. More recent examples (that I have missed due to conservative assumptions) were PIR and CPWM, both of which came back from near death experience. If I am right, LCAV can do $1+ in fully-taxed EPS vs. $1.80 prior peak and $1.50+ FCF. Even a low teens multiple + $2 cash can get you to $15+, or a 3 bagger from here. If I am wrong, the company should still generate low-mid single digit EBIT margin and generate decent FCF, so downside appears somewhat limited with 40% of market cap in cash. What’s interesting to me is that the stock had traded higher in ’10 and ’11 when fundamentals were arguably much worse. If you stare at the long-term price charts over 20 years, you will see the stock has periodically gone through boom and bust cycles. I am not arguing the business is great/stable over the cycle, but if one can time the cycle, upside is tremendous.

  2012 2013 Normal
# shares 19 19 19
Price $5.2 $5.2 $5.2
Mkt Cap $99 $99 $99
Net Cash $38 $38 $38
EV $61 $61 $61
EV/sales 0.5 0.4 0.4
EV/EBITDA 7.8 3.9 1.8
Cash/share $2.0 $2.0 $2.0
EV/FCF 9.2 4.4 2.0

 

Catalyst

continued positive SSS and earning revision
    sort by    

    Description

    LCAV:

    After the worst industry downturn, LCA Vision is experiencing a turn in the fundamentals and on the cusp of turning profitable again. Pent-up demand, reduced industry capacity, and significant cost cutting have set up the company to reach/exceed prior peak EBIT margins at 15-20%. While the stock has bounced off the bottom (up 150%), it is well below prior peak of $50+. With 40% of market cap in cash and 0.5x forward sales, the stock is essentially a long dated option on the eventual recovery of the laser vision correction market with multi-bagger potential.

    Company/Industry Overview: Based in Cincinnati, LCAV is one of the largest providers of LASIK surgeries in US and operates 53 centers (down from 75 in ’08). There are around 60m people in the US who are eligible for laser eye surgeries. The procedure/industry has been around for some time and experienced significant growth in late 90’s before plateauing around 1.25-1.4m procedures/year from 2000 to 2007. The industry is dominated by individual surgeons, while chains make up 20-30% of total procedure volume, with LCAV/TLC Vision being the two largest players, each claiming 13% of market during the peak in ’07.

    The average cost per procedure is around $2K. Unlike most other surgeries, most laser vision correction procedures are not covered by insurance and thus paid out of pocket. The big ticket make the procedure as discretionary as it gets, and not surprisingly the industry took a big hit in the recent recession, with volume down 40% from the peak.

    Volume in mm's                  
    2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E
    1.39 1.35 1.15 1.18 1.28 1.37 1.36 1.37 1.02 0.75 0.74 0.76


    Why LCAV now? The industry downturn hit LCAV and TLCV very hard. TLCV in fact filed for bankruptcy in Dec ’09 (since emerged under PE fund ownership). LCAV had its share of issues (over-expansion during the boom years, bad debt, proxy fight). Total procedures performed fell from 192K in ’07 to 57K in ’10. Under a new mgmt team, the company closed 1/3 of its centers, reduced headcount by 54% and cut G&A by 40% since ’07, yet still lost serious money after doing 15%+ EBIT in the previous 4 years. The company only survived by the virtue of its great balance sheet.

    After four tough years, procedure volume is finally rebounding, with five straight quarters of positive SSS, 18% SSS growth in Q3 and 33% in Q4 as pre-announced. It is hard to pinpoint exactly what is behind the rebound, but an improving economy is most likely the biggest driver. LCAV is also taking some market share. Since there is no other technology break-through, I do not see any structural reason why the decline in procedures over the last few years is permanent – the benefit is clear, and price was likely the only reason why people chose to defer the procedure. We have seen this movie before after the ’02 recession, when the industry suddenly sprung to life in early ’04 up 30%. There is also some conforming evidence in other types of semi-discretionary surgeries (orthopedic) showing signs of life with fewer people deferring.

    During the downturn, LCAV shut 1/3 of its centers. I couldn’t find much information on TLCV since it is no longer public, but it is probably reasonable to assume that it has also closed some under-performing centers during/after the bankruptcy restructuring process. My guess is that the industry probably saw 10-15% reduction in capacity from a peak of 1300 LVC centers in ’07. In the mean time, population has grown a bit, and if normal procedure volume is 1.2m (2% of eligible population, some also estimate 1.2m is the number of new patients who become eligible each year), then we also have built up more than 1 full year of pent-up demand over the last 4 years, much like the same exercise many have gone through for housing and autos. Encouragingly, pricing actually held up pretty well during the downturn, although some of it was likely the result of the mix benefits.

    So the setup of the story looks pretty good -- an industry rebounding after a long/deep downturn, a company that is extremely lean, has high operating leverage (incremental gross margin over 65%), and could produce high FCF (low capex, NOL shielding tax).

    Numbers:

    I am attaching a model with historical data as well as my projections for ’12 and ’13 and “Normal”, which is assuming LCAV has 8% of market share of 1.2m industry volume.

    LCAV finished ’11 with 60K procedures. Mgmt has guided that the company will be cashflow positive at 70K volume, while I am actually modeling the company do double digit SSS in ‘12/’13, hit 70k target in ’12 and reach decent profitability in ’13. The company is also testing providing some other ancillary procedures to boost topline and leverage the fixed costs. I am not modeling any of that.

                           
    LCA-Vision 2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011E 2012E 2013E Normal
                           
    Net Patient Service Revenue $127,123 $176,874 $238,925 $292,634 $205,175 $129,213 $99,825 $103,607 $126,167 $141,560 $172,800
    Mgmt & other                  -                  -                  -                  -                  -                  -                  -                  -                  -                  -  
         Net operating Revenue 127,123 176,874 238,925 292,634 205,175 129,213 99,825 103,607 126,167 141,560 172,800
                           
    Operating Expenses:                      
    Medical Prof & License (variable) 24,274 33,500 42,954 49,312 41,797 28,747 24,160 25,225 29,848 32,836  
    Direct Costs of Services 40,842 54,952 77,612 97,422 77,548 63,579 46,631 43,236 46,695 49,029  
    General and Admin Exp. 10,292 14,021 21,157 22,657 20,265 16,502 13,956 14,218 15,100 16,100  
    Marketing and Advertising 20,468 31,812 47,971 66,469 52,429 33,784 24,113 23,249 26,737 28,074  
    Depreciation and Amortization 7,046 7,636 8,452 11,210 17,971 14,197 9,408 5,803 5,672 5,438  
    Restructuring/Impairment 0 0 0 0 0 0 0 0 0 0  
    Other 0 0 0 0 0 0 0 0 0 0  
    Total Costs & Exp. 102,922 141,921 198,146 247,070 210,010 156,809 118,268 111,731 124,051 131,476 145,152
    Gross Margin $ 62,007 88,422 118,359 145,900 85,830 36,887 29,034 35,146 49,625 59,695  
         Operating Income (EBIT) 24,201 34,953 40,779 45,564 (4,835) (27,596) (18,443) (8,124) 2,116 10,083 27,648
         EBITDA  31,247 42,589 49,231 56,774 13,136 (13,399) (9,035) (2,321) 7,788 15,521 34,560
    Interest Expense              (12)              (81) (125) (370) (553) (658) (419) (250) (91) 0  
    Interest Income           2,125           3,925 6,231 6,346 (980) 2,386 1,825 804 405 416  
    Other Income              262              118 75 0 33 433 0 0 0 0  
         Income (loss) before taxes 26,401 38,828 47,680 51,725 (5,858) (25,312) (17,012) (7,570) 2,430 10,500 34,560
    Income Taxes  (benefit)           5,911         15,832 19,310 19,221 (2,050) (8,859) (5,954) (2,649) 850 3,675 12,096
         Net Income  (loss) 20,490 22,996 28,370 32,504 (3,808) (16,453) (11,058) (4,920) 1,579 6,825 22,464
                           
    Fully-Taxed Diluted EPS $0.98 $1.07 $1.34 $1.64 ($0.21) ($0.88) ($0.59) ($0.26) $0.08 $0.36 $1.12
    FCF/share $1.32 $1.43 $1.74 $2.21 $0.76 ($0.12) ($0.09) $0.05 $0.35 $0.73 $1.63
                           
    Average Diluted Shares Outstanding 20,807 21,480 21,212 19,811 18,549 18,593 18,680 18,853 18,970 19,122 20,000
                           
    YoY Growth                      
    Revenue 56.1% 39.1% 35.1% 22.5% -29.9% -37.0% -22.7% 3.8% 21.8% 12.2%  
    EBITDA 131.0% 36.3% 15.6% 15.3% -76.9% -202.0% -32.6% -74.3% -435.5% 99.3%  
                           
    Margin Analysis                      
    Gross margin (medical prof & direct cost) 48.8% 8.4% 49.5% 49.9% 41.8% 28.5% 29.1% 33.9% 39.3% 42.2%  
    Incremental GM 61.0% 0.0% 48.2% 51.3% 68.7% 64.4% 26.7% 161.6% 64.2% 65.4%  
    EBITDA 24.6% 24.1% 20.6% 19.4% 6.4% -10.4% -9.1% -2.2% 6.2% 11.0%  
    EBIT 19.0% 19.8% 17.1% 15.6% -2.4% -21.4% -18.5% -7.8% 1.7% 7.1% 16.0%
                           
    Medical Prof & License 19.1% 18.9% 18.0% 16.9% 20.4% 22.2% 24.2% 24.3% 23.7% 23.2% 20.0%
    Direct Costs of Services 32.1% 31.1% 32.5% 33.3% 37.8% 49.2% 46.7% 41.7% 37.0% 34.6% 32.0%
    General and Admin Exp. 8.1% 7.9% 8.9% 7.7% 9.9% 12.8% 14.0% 13.7% 12.0% 11.4% 10.0%
    Marketing and Advertising 16.1% 18.0% 20.1% 22.7% 25.6% 26.1% 24.2% 22.4% 21.2% 19.8% 18.0%
    Depreciation and Amortization 5.5% 4.3% 3.5% 3.8% 8.8% 11.0% 9.4% 5.6% 4.5% 3.8% 4.0%
    Tax Rate 22.4% 40.8% 40.5% 37.2% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
                           
    Key Metrics                      
    Total Centers 44 50 59 72 75 62 54 53 53 53 53
    Y/Y Procedure Growth 46.3% 48.2% 30.5% 3.7% -40.1% -36.8% -22.1% 5.1% 20.4% 10.0% 21.7%
    Procedure/center 2,178 2 3,140 2,670 1,535 1,174 1,050 1,124 1,353 1,489 1,811
    Est. Same-Store Procedure Growth   39.7% 16.0% -7.4% -47.1% -34.6% -10.2% 13.3% 20.0% 10.0%  
                           
    Revenue/Procedure $1,326 $1,356 $1,293 $1,546 $1,774 $1,793 $1,759 $1,741 $1,763 $1,798 $1,800
    Y/Y Growth 6.7% 2.2% -4.7% 19.6% 14.7% 1.1% -1.9% -1.0% 1.3% 2.0%  
                           
    Industry Volume 1,320,000   1,370,000 1,370,000 1,016,000 748,855 737,100 763,500 0 0  
    Mkt Share       14.0% 11.3% 9.7% 7.7% 7.8% 8.0% 8.0%  
                           
    Operating Costs/Procedure $1,074 #VALUE! $1,070 $1,285 $1,824 $2,155 $2,085 $1,875 $1,729 $1,666  
    Marketing $/procedure  $          214  $            -    $          259  $          346  $          455  $          464  $          425  $          390  $          373  $          356  

    One may question on whether my margin assumptions are too aggressive. In many ways, I feel LCAV is similar to a trough margin retailer experiencing a turn-around in sales. I have encountered many of these turn-around stories, where the eventual margin/profit progression far exceeds original expectation – most analysts tend to way under-estimate the operating leverage in the model. URGI and KIRK were both VIC ideas that worked out great. More recent examples (that I have missed due to conservative assumptions) were PIR and CPWM, both of which came back from near death experience. If I am right, LCAV can do $1+ in fully-taxed EPS vs. $1.80 prior peak and $1.50+ FCF. Even a low teens multiple + $2 cash can get you to $15+, or a 3 bagger from here. If I am wrong, the company should still generate low-mid single digit EBIT margin and generate decent FCF, so downside appears somewhat limited with 40% of market cap in cash. What’s interesting to me is that the stock had traded higher in ’10 and ’11 when fundamentals were arguably much worse. If you stare at the long-term price charts over 20 years, you will see the stock has periodically gone through boom and bust cycles. I am not arguing the business is great/stable over the cycle, but if one can time the cycle, upside is tremendous.

      2012 2013 Normal
    # shares 19 19 19
    Price $5.2 $5.2 $5.2
    Mkt Cap $99 $99 $99
    Net Cash $38 $38 $38
    EV $61 $61 $61
    EV/sales 0.5 0.4 0.4
    EV/EBITDA 7.8 3.9 1.8
    Cash/share $2.0 $2.0 $2.0
    EV/FCF 9.2 4.4 2.0

     

    Catalyst

    continued positive SSS and earning revision
      Back to top