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Did fear beat up Ocular Sciences?
By Barbara C. Costanza, CBS MarketWatch
Last Update: 2:23 PM ET Jun 11, 1999 Earnings Surprise
NEW YORK (CBS.MW) -- Investors dumped shares of Ocular Sciences after the contact lens company warned of an earnings shortfall. Afterwards, analysts thought they were near-sighted.
The company (OCLR: news, msgs) warned that soft U.S. sales of its contact lenses could push earnings as much as 20 percent below analysts' expectations for the second half of the year.
The sluggish performance will cut sales by 5 percent and earnings by 10 percent in the second half of the year, said CEO Norwick Goodspeed. "Optical trends are lagging the [strong] retail trends," Goodspeed said, adding he had "no idea" why that is true. Further, he said earnings could be clipped by another 10 percent due to increased pricing pressure. See full story.
The stock dropped 4 3/4 to 14 7/8 after Wednesday's warning.
Reaction vs. reality
As analysts raced in to cut estimates, investors raced out to dump the stock. However, those same analysts believe the stock is extraordinarily cheap for several good reasons.
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"Lordy lordy. Fear beat the pulp out of greed in the last few days on OCLR," noted Robert Faulkner and Chris H. Shibutani, analysts at Hambrecht & Quist. Faulkner and Shibutani concede that competition has become tight and growth has come to a halt. However, the analysts stated the company is clearly neither going out of business nor going unprofitable, and management's business execution is strong.
Take a look at the fundamentals. Revenue along with earnings has increased year-over-year since 1997. In difficult periods or a slowdown in a company's growth long-term debt can add to potential problems. But take a look at Ocular's long-term debt, it accounts for about 1 percent of the company's capital.
Look at the company's balance sheet for fiscal 1999. The company reported cash, cash equivalents and investments of about $54.7 million, with total assets of $186.1 million and total debt of $3.37 million.
SG Cowen's analyst Michael G. Mullen lower his earnings estimate for fiscal 2000 to $1.90 from $2.10 a share. However, Mullen noted he has confidence in the company's growth over the long term.
Robert W. Baird's analyst Suey Wong believes the investment is risky but the stock offers greater upside potential than downside risk. The firm cut its estimates to $1.50 and $1.80 for fiscal 1999 and 2000, from $1.70 and $2.20, respectively.
Bear Stearns analyst Rick Wise cut his estimate for 1999 to $1.50 from $1.73 and fiscal 2000 to $1.80 from $2.15 a share. In research notes,Wise said the stock may tread water for a while but stands pat on his "buy" rating.
Shares finished Friday up 5/16 at 16 1/8.