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11 May, 2007

LCA Vision (LCAV) – Why Headlines Mislead

Filed under: LCAV,stocks — abs1nthe @ 10:03 am

I really like LCA Vision. It’s a growth story without a lot of financial drama–though it has more than its fair share of family drama. Early this week, LCA Vision reported First Quarter results showing 18% revenue growth. Yet, Wall Street whacked the company by shaving about $3 off the then $44 stock. Why? Because of headlines like: “LCA Misses Estimates.”

So let’s get the lurid details of the family out of the way first. Stephen Joffe founded the company. He relinquished the CEO title and then re-assumed them in 2001. He again resigned in February 2006 when his Board discovered that Mr. Joffe had made a $26 million investment in LCA Vision competiton, TLC Vision. His son, a lawyer by training, Craig Joffe (age 30), took on the title of Acting-CEO, saying that he was also surprised by his father’s investment, that his reaction was multi-faceted, and that the investment did affect the father-son relationship. Early this year, the Board found a new CEO, leading to Craig Joffe’s resignation from the company.

LCA Vision is provider of laser vision corrective services. Back-story aside, this company has done incredibly well over the last three years, growing topline revenues from $130 million in 2004, to $176 million in 2005, and to $239 million in 2006 (Based upon restated earnings). LCA Vision recently restated earnings because they had made a mistake in their accounting of separately priced warranties. Essentially, they deferred revenue that should have been accounted for over the life of the contract. There was no impact to cash in the restatement.  In fact, future periods will benefit from increased revenues.  They announced the need for a restatement on April 18.

So why do I say that headlines mislead? Before the announcement that LCA Vision would restate revenues, the consensus estimate for LCA Vision was $0.64 per share profit for the 1st Quarter of 2007. Their actual profit was $0.54. So, the headline, “LCA Misses Estimate,” was technically correct, but the consensus came BEFORE the restated results. Here is the really crazy part: despite restating results lower for the previous 3 years, LCA Vision is still sticking to their pre-restatement prediction of at least $2.05 in earnings for 2007.

My Take: Buy now or wait until the stock drops a bit during the summer (historically weak earnings and stock price for the stock). Sell at $48 in 9 to 12 months. So, I’m predicting a 20% plus gain over the course of less than a year. It’s too early to determine whether this stock is a long-term hold since it has a new management team.

69 Comments

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