By: Adam Webb, AIM Student at Marquette University
Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
• STAAR Surgical Co. (STAA, $124.06) engages in the development, manufacture, production, marketing, and sale of implantable lenses for the eye and delivery systems used to deliver the lenses into the eye. It specializes in refractive and cataract solutions. Its products include intraocular lens and implantable collamer lens.
• Broadwood Capital currently owns a 23.6% stake in STAAR and has already shown activism in its recommendation to increase the number of directors on the board.
• Consensus analyst price target of $87.10, investment thesis price target $47.99 the equity currently trades at 42% higher than its price target and 153% higher than the original price target.
• 42% of current revenues come from China, A market the company estimates could potentially carve out a 25% market share by the end of next year. The company already controls over 20% but future growth past estimate is not probable.
STAAR has reacted very positively to its new leading stakeholder Broadwood Capital and there 23.6% stake. Broadwood has been keen on creating a relationship with STAAR and has been able to successfully position two new board members. Price reactions to such announcements were very positive with a 14% jump after the announcement of the new board members.
These outside factors have driven the equity to a price well above its current consensus price target of $87.10 and the investment thesis price target of $47.99. From a discounted cash flow perspective, the current valuation of the company is ultimately ignoring the recent management guidance predicting sales of $161.7MM for FY20 unless surreal growth is expected to influence the company in the years to come.
Revenue growth, however, isn’t likely to occur at these supersonic rates. Currently, 42% of current revenues come from its Chinese domicile. A market where the company has also been able to grow its product lines to 20% of the engrossed market. The management team has communicated in past earnings reports that it is improbable that the company would be able to encapsulate more than 25% of the Chinese market. To find such revenue growth, the company would have to turn to its Japan segment which makes up 17.9% of current revenues. Japan is also an attractive target for growth due to its status as the worlds most elderly country with an average population age of 48.3 years which drives increase demand for refractive and cataract solutions. However, STAAR has been in the market for 22 years and is yet to have effectively penetrate the market deriving only $24,974MM in revenue over past nine months ended.
What has the stock done lately?
STAA is $3 below its all-time high after its recent price explosions. Since it was added to the Small Cap Portfolio at $36.40 in February of 2020 it has amassed an ROI of 241%. Multiples for the company reiterate the extreme price growth with a P/E multiple of 660.9x, EV/EBITDA of 656x, and a PEG of 7.1.
Past Year Performance:
STAA has seen its price increase 236.11% LTM in comparison to its Russell 2000 benchmark which increased 35.66%. STAAR is looking like it is on the brink of facing headwind as institutional investors have began to decrease positions. The 52 week H-L for STAA is $23.30-$127.70. The top fifteen institutional stakeholders – whom own 62% of shares – have decreased their positions by -296K shares.
Due to a lack of growth opportunities and a market valuation that has been manipulated due to investor activism, it is recommended that the portfolio should follow the institutional stakeholders and realize profits. Selling of this equity would result in an ROI of 241% well above the investment thesis and well above consensus price targets.