Rating Update: Stock Rating F-Lowest (7/19/19)-STAAR Surgical Company (STAA).

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BUSINESS

STAAR Surgical Company, together with its subsidiaries, designs, develops, manufactures, markets, and sells implantable lenses for the eye, and delivery systems to deliver the lenses into the eye. The company provides Visian implantable collamer lenses (ICLs) to treat visual disorders, such as myopia, hyperopia, astigmatism, and presbyopia; and Hyperopic ICL, which treats far-sightedness. It also offers minimally invasive intraocular lenses (IOLs), including foldable IOLs for use in minimally invasive cataract surgical procedures; aspheric IOLs that produce a clearer image than traditional spherical lenses; and nanoFLEX IOL, a single piece collamer aspheric optic, as well as preloaded injectors for use in cataract surgery. In addition, the company sells injector parts, and other related instruments and devices.
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INVESTMENT RATING

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Reflecting future returns on capital that are forecasted to exceed the cost of capital, STAA is expected to continue to be a Value Builder.

STAAR Surgical has a current Value Trend Rating of F (Lowest Rating).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing consistent signals. STAAR Surgical has a poor Power Rating of 27 and a very low Appreciation Score of 11, triggering the Lowest Value Trend Rating.

STAAR Surgical’s stock is selling significantly above targeted value. The current stock price of $31.05 compares to targeted value 12 months forward of $12.
STAAR Surgical’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
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STAAR Surgical has a Power Rating of 27. (STAA’s poor Power Rating indicates that it only has a higher likelihood of achieving favorable investment performance over the near to intermediate term than 27% of companies in the universe.)
Factors contributing to this poor Power Rating include: recent price action has been unfavorable; and earnings estimate behavior for STAA has been slightly negative recently. An offsetting factor is is in a strong phase current.

INVESTMENT PROFILE

STAA’s financial strength is average. Financial strength rating is 56.
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Relative to the S&P 500 Composite, STAAR Surgical Company has slightly more Growth than Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that STAA is higher risk. Relative weaknesses include: low forecasted profitability, low historical profitability, low financial strength, high stock price volatility, and high earnings variability. STAA’s valuation is high: low dividend yield, high P/E ratio, and high price/book ratio. STAA has unusually low market capitalization.

CURRENT SIGNALS

STAAR Surgical’s current operations are strong. Return on equity is rising, reflecting: widening pretax margins; and rising leverage.

STAAR Surgical’s current technical position is mixed. The stock price is in a 1.6 month up move. The stock has appreciated 34.0% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Recent meaningful positive changes in investment behavior have benefitted STAAR Surgical Company (NASDAQ: STAA): positive upside/downside volume developed.
Positive development: significant quarterly sales acceleration occurred. Negative development: significant quarterly earnings deceleration occurred.
The stock is currently rated F.
STAAR Surgical Company (NASDAQ: STAA) stock suffered a major decline of -11.1% on 7/19/19. The shares closed at $0.52. However, trading volume in this decline was below average at 74% of normal. The stock has been extremely weak relative to the market over the last nine months but has risen 0.8% during the last week.

CASH FLOW

In 2018, STAAR Surgical generated a very significant increase in cash of +$85.36 million (+461%). Sources of cash were much larger than uses. Cash generated from 2018 EBITDA totalled +$9.06 million. 2018 non-operating sources contributed no cash. Cash taxes consumed -$1.00 million (-11% of EBITDA). Re-investment in the business amounted to -$6.36 million (-70% of EBITDA). On a net basis, debt investors pulled out -$0.91 million (-10% of EBITDA) while equity investors supplied +$84.52 million (+933% of EBITDA).
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STAAR Surgical’s Non-operating Income, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the top quartile and lower quartile. Currently, STAAR Surgical is upper quartile at +0% of EBITDA ( $0.00 million).

STAAR Surgical’s Cash Taxes, %EBITDA enjoyed a volatile overall uptrend over the period. This improvement was accompanied by a similar trend for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the top quartile and lower quartile. Currently, STAAR Surgical is lower quartile at -11% of EBITDA (-$1.00 million).

STAAR Surgical’s Business Re-investment, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by stability for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the top quartile and second quartile. Currently, STAAR Surgical is below median at -70% of EBITDA (-$6.36 million).

STAAR Surgical’s Debt Investors, %EBITDA has experienced a volatile overall downtrend over the period. This downtrend was accompanied by stability for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the third quartile and top quartile. Currently, STAAR Surgical is below median at -10% of EBITDA (-$0.91 million).

STAAR Surgical’s Equity Investors, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the top quartile and lower quartile. Currently, STAAR Surgical is upper quartile at +933% of EBITDA (+$84.52 million).

STAAR Surgical’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by a similar trend for the Staar Surgical Company Peer Group. In most years, STAAR Surgical was in the top quartile and second quartile. Currently, STAAR Surgical is upper quartile at +942% of EBITDA (+$85.36 million).
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STAAR Surgical’s Cash, %Revenue has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by an opposite trend for the Staar Surgical Company Peer Group. (Since 2016 Cash, %Revenue has accelerated very sharply.) In most years, STAAR Surgical was in the second quartile and third quartile. Currently, STAAR Surgical is upper quartile at +84%.

PROFITABILITY

STAAR Surgical’s return on equity has improved very significantly since 2011 accelerating very sharply after the 2016 level.
This very significant improvement was due to very strong positive trend in pretax operating return supported by strong positive trend in non-operating factors.
The productivity of STAAR Surgical’s assets declined over the full period 2009-2019: asset turnover has suffered a very strong overall downtrend that accelerated very sharply after the 2017 level.
More than offsetting this trend, however, pretax margin enjoyed a volatile overall uptrend that accelerated very sharply from the 2016 level.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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STAAR Surgical’s return on equity is below median (4.2%) for the four quarters ended March, 2019.
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Operating performance (pretax return on assets) is slightly above median (4.3%) reflecting asset turnover that is lower quartile (0.73X) and substantially above median pretax margin (5.9%).
Tax “keep” rate (income tax management) is at the lower quartile (75.6%) resulting in after tax return on assets that is slightly above median.
Financial leverage (leverage) is lower quartile (1.29X).

GROWTH RATES

There are no significant differences between STAAR Surgical’s longer term growth and growth in recent years.
STAAR Surgical’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has exceeded equity growth.

Annual revenue growth has been 4.5% per year.

Total asset growth has been 9.2% per year.

Annual E.P.S. growth has been 37.6% per year. (More recently it has been 191.7%.)

Equity growth has been 14.7% per year.

STAAR Surgical’s consensus growth rate forecast (average of Wall Street analysts) is 30.0% — substantially above the average of the historical growth measures.
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Relative to the Staar Surgical Company Peer Group, STAAR Surgical’s historical growth measures are erratic. Equity growth (14.7%) has been at the upper quartile. E.P.S. growth (37.6%) has been above median. Total asset growth (9.2%) has been at median. Revenue growth (4.5%) has been substantially below median.

Consensus growth forecast (30.0%) is upper quartile.
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PRICE HISTORY

Over the full time period, STAAR Surgical’s stock price performance has been volatile and exceptional. Between September, 2008 and July, 2019, STAAR Surgical’s stock price rose +592%; relative to the market, this was a +171% gain. Significant price moves during the period: 1) September, 2018 – May, 2019: -52%; 2) May, 2016 – September, 2018: +784%; 3) March, 2014 – January, 2015: -68%; 4) February, 2013 – March, 2014: +249%; 5) April, 2012 – July, 2012: -53%; and 6) July, 2011 – April, 2012: +141%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -5.2% is substantially below median relative to the S&P 500 Composite.
In addition to being substantially below median relative to S&P 500 Composite, current annual total return performance through June, 2019 of -5.2% is below median relative to STAAR Surgical Company Peer Group.

Current 5-year total return performance of 11.8% is slightly above median relative to the S&P 500 Composite.
Through June, 2019, with slightly above median current 5-year total return of 11.8% relative to S&P 500 Composite, STAAR Surgical’s total return performance is above median relative to STAAR Surgical Company Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, STAA’s overall valuation is exceptionally high. All five factors are lower quartile. The highest factor is the price/earnings ratio, followed by the ratio of enterprise value/earnings before interest and taxes, then by the ratio of enterprise value/assets, then by the ratio of enterprise value/revenue. The lowest factor is the price/equity ratio.

Relative to STAAR Surgical Company Peer Group, STAA’s overall valuation is quite high. The highest factor, the price/earnings ratio, is at the upper quartile. Ratio of enterprise value/earnings before interest and taxes is at the upper quartile. Ratio of enterprise value/assets is upper quartile. Ratio of enterprise value/revenue is upper quartile. The lowest factor, the price/equity ratio, is at the upper quartile.
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STAAR Surgical has a major value gap compared to the median valuation. For STAA to achieve median valuation, its current ratio of enterprise value/revenue would have to fall from the current level of 9.97X to 4.17X. If STAA’s ratio of enterprise value/revenue were to fall to 4.17X, its stock price would be lower by $-17 to $14.
For STAA to fall to lower quartile valuation relative to the STAAR Surgical Company Peer Group, its current ratio of enterprise value/revenue would have to fall from the current level of 9.97X to 0.75X. If STAA’s ratio of enterprise value/revenue were to fall to 0.75X, its stock price would decline by $-27 from the current level of $31.

VALUE TARGETS

Reflecting future returns on capital that are forecasted to exceed the cost of capital, STAA is expected to continue to be a Value Builder.
STAAR Surgical’s current Price Target of $14 represents a -55% change from the current price of $31.05.
STAAR Surgical’s very low appreciation potential results in an appreciation score of 11 (89% of the universe has greater appreciation potential.)
Reinforcing this low Appreciation Score of 11, the low Power Rating of 27 contributes to an Value Trend Rating of F.
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STAAR Surgical’s current Price Target is $14 (+27% from the 2018 Target of $11 but -55% from the 07/19/19 price of $31.05). This rise in the Target is the result of a +30% increase in the equity base and a -2% decrease in the price/equity multiple. The forecasted increase in growth has a very large positive impact on the price/equity multiple and the forecasted increase in return on equity has a very large positive impact as well. More than offsetting these Drivers, the forecasted increase in cost of equity has a very large negative impact.
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PTR’s return on equity forecast is 15.0% — slightly above our recent forecasts. Forecasted return on equity suffered a dramatic, erratic decline between 2010 and 2018. The current forecast is significantly below the 2013 peak of 27%.

PTR’s growth forecast is 34.0% — substantially above our recent forecasts. Forecasted growth enjoyed a dramatic, erratic increase between 2010 and 2018. The current forecast is significantly above the 2017 low of 3%.

PTR’s cost of equity forecast is 11.0% — slightly above recent levels. Forecasted cost of equity exhibited a modest, erratic increase between 2010 and 2018. The current forecast is well above the 2010 low of 4.2%.
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At STAAR Surgical’s current price of $31.05, investors are placing a positive value of $18 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 12.0% versus a cost of equity of 6.7%.
PTR’s 2020 Price Target of $14 is based on these forecasts and reflects an estimated value of existing assets of $10 and a value of future investments of $4.

About John Lafferty 44922 Articles
During his career, John has developed valuation and stock rating methodologies, managed institutional portfolios and mutual funds, and provided equity research to institutional investors on thousands of companies. He has been Director of Research at PTR since its inception in 2004.

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