Description

South San Francisco-based Ocular Sciences, Inc. (NASDAQ: OCLR) designs, markets and distributes specialty contact lenses for disposable regimens and competes in the eyecare industry's fastest growing segment. Its business model entails offering a broad line of high-quality, competitively priced, soft contact lenses marketed directly to eye-care practitioners, brand-differeriated by private label and distribution channel, thus avioding costly marketing campaigns. Its proprietary lens technology makes OCLR's lenses among the most comfortable to wear and easiest to handle within the industry, a major competitive advantage.

OCLR shares plunged almost two years ago, dropping 28% on June 8th, 1999, and a further 24% the next day to close at $14.875. The high volume selling climax was precipitated by an earnings warning. This served to deflate much of the premium previously build up in the stock by highly favorable media exposure (e.g., earning #30 on Forbes 1998 "200 Best Small Companies" list, one of Business Week's "Hot Growth Companies" of 1999, etc.) The stock bottomed last September, and has been steadily basing ever since.

Now trading around $18.93, OCLR shares are still 46% off their all time May 10, 1999 high of $35.25, have a PE of 11.34, FPE of 11.5, PEG of 0.76, price-to-sales of 2.44, price-to-book value of 1.93 and a long term debt to equity ratio of 0.02 - with $64.69 million in cash on hand.

OCLR's ROE, ROA and ROI of 19.11%, 15.78% and 18.42%, respectively, all exceed those rival Baush & Lomb (NYSE: BOL). Likewise OCLR's gross margin, operating margin and profit margin of 58.79%, 18.54% and 22.00%, respectively, all exceed those of 1-800-CONTACTS (NASDAQ: CTAC).

OCLR IPOed in July, 1997, has delivered increasing sales and EPS results ever since and boasts top and bottom line 5 year CAGRs of 21.05% and 29.65% The company throws off plenty of free cash flow, has surprised to the upside for the last 3 quarters, and its March 2001 Qtr's numbers are expected to be the last flat results before rapid reaccereleration on new products. Its recent acquisition of Paris-based Essilor International SA should be immediately accretive, and now gives it a platform in all three of the world's top soft contact markets (US, Japan & Europe).

Using BOL and CTAC's valuations, OCLR shares should sell for $40 each.

Catalyst

OCLR's new disposable toric soft contact lens product offers patients improved comfort, visual stability and acuity. Likewise its disposable bifocals are among the fastest growing products in this industry. Greater distribution, increased earnings visibility and an undervaluation relative to its peer group should act as a price catalyst in the near term.