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Doing the Tuna Dance

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March 29, 2008 – Comments (2) | RELATED TICKERS: EYE

Doing the Tuna Dance There is nothing in the prior six (6) year value history that lends itself to interest in this stock at present.One of the items I look for is earnings stability, which this company does not posses. While acquisitions can tend to dilute earnings in the short-term, I try and look for acquisitions that have been accretive to earnings, pushing them, at least over the very short term, higher. I do this because it is an indicator to me that management’s acquisition was not only sound, but also timely.Alas, such is not the case, at least in my opinion, with Advanced Medical Optics, Inc. (NYSE: EYE).The company has three product lines: cataract / implant, laser vision correction, and eye care.In the cataract and implant market, the company focuses on four products required for cataract surgery: foldable intraocular lenses (IOLs), implantation systems, phacoemulsification systems and viscoelastics.In the laser vision correction market, the Company markets excimer and femtosecond laser systems, related treatment cards and disposable patient interfaces, and diagnostic devices.The Company’s eye care product line provides a range of contact lens care products for use with most types of contact lenses. These products include single-bottle, multi-purpose cleaning and disinfecting solutions, hydrogen peroxide-based disinfecting solutions, daily cleaners, enzymatic cleaners and contact lens rewetting drops.The Company’s products are sold in approximately 60 countries.Aside from what I believe is a less than astute management team, or perhaps because of it, the company finds itself faced with a few, well I suppose 82 can be considered a few, personal injury lawsuits, stemming from it’s contact lens product Complete Moisture Plus.Growing up I was told that….doing that….could cause blindness. Imagine my surprise when I found out that apparently the company’s contact lens product might do the same thing. Maybe mother knew best after all!At any rate, so the company makes eye care products, from lasers to eye lens replacement stuff. In an effort to expand its market positions in its business categories, the company has been on a buying spree over the past several years, a buying spree that I don’t think management had really thought through before starting it.  As a result, the company has ended up leveraging itself almost into oblivion, increasing its debt levels from fiscal 2002 thru fiscal 2007 by slightly more than 575%.At the same time debt levels were increasing, sales over that same period were increasing by slightly more than 200%, while, miracle of miracles, net income was decreasing by almost 650%.Admittedly I am not the sharpest pencil in the packet. Yet, even with my less than keen intellect I have been able to conclude that increasing debt levels and decreasing net income levels cannot be sustained over the longer term if the company is to remain a viable on going concern.Another of the things that sort of makes me wonder just what is going on with the company is its interest expenses, which have increased by 347% over the fiscal 2002 thru fiscal 2007 period.Or put another way, net income has been reduced by about $1.15 so the company could invest that $1.15 in acquisitions that have resulted in a $0.43 reduction in sales over 2002 thru 2007 period.Hello…management…you guys are in the eye care business! How is it you seem so blind?With sales per share of $18 for fiscal year ending December 2007 and debt per share of $26.53 for the same period, I have to wonder if perhaps management, like Elvis, has left the building.It’s almost as if management is telling shareholders…plant your lips right here. Okay, okay, I get it; interest rate conditions at present are favorable for servicing the company’s debt. But these favorable conditions won’t last forever, and since I could find nothing in management’s discussion that highlighted any plans for lowering the company’s debt, I have to believe that future earnings growth is in serious jeopardy.Certainly I am not risk averse. But I believe that there should be a reward proportionate to the risk taken, and with a tangible book value for fiscal 2007 of ($22.11) and a recent share price of $20.01, I fail to see how an investment in the stock of this company will offer anything but a risk that is far greater than any contemplated reward.As such, I believe that an investment in Advance Medical Optics, Inc. should be avoided at all costs, at least until a definitive plan has been developed that will substantially lower the company’s debt obligations, or until the current management team has been replaced with a dancing tuna and an abacus.Wax

2 Comments – Post Your Own

#1) On March 29, 2008 at 6:08 PM, devoish (96.53) wrote:

Nice post Wax.

Folks, if you think that was good, go read his pitches.

 

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#2) On March 29, 2008 at 7:37 PM, ATWDLimited (< 20) wrote:

Great Post. Good analysis.

Hey, Come view the The official Dollar Report, its loaded with analysis of the dollars actual value, that you cant get anywhere else, since I calculated it all my self and made the graph for inflation, GDP, M3 and Debt and compared them as backings per dollar. 

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