On Dec 27, 2014, Zacks Investment Research downgraded STAAR Surgical Company (STAA) to a Zacks Rank #5 (Strong Sell).
Why the Downgrade?
STAAR Surgical reported a dismal third-quarter 2014. Adjusted loss came in at 4 cents per share, underperforming the Zacks Consensus Estimate of earnings of 3 cents. The bottom line also deteriorated considerably from the year-ago earnings of 2 cents per share.
Although net sales increased 6.3% (9% at constant currency) year over year to $18.2 million, the top line fell shy of the Zacks Consensus Estimate. The sales growth was weaker than anticipated due to 44.6% and 3.9% sales decline in Korea and the U.S., respectively.
The company continues to face challenges on the margin front. STAAR Surgical’s gross margin was negatively impacted by higher distribution costs, increased inventory reserves, ICL unit costs and preloaded acrylic mix. Unfavorable product mix (higher unit sales of lower-margin IOL injectors) also affected results. Moreover, the company expects this trend to continue, going forward.
On May 21, 2014, STAAR Surgical had received a warning letter from the FDA citing violations observed at the company's lens factory in Monrovia, CA, during an inspection. Though the company is in the process of reviewing its quality system, we view this as a major headwind facing the company in the near term.
Analysts naturally remain jittery, primarily owing to the number of headwinds. Over the last 60 days, there has been one downward revision compared to none in the positive direction. Consequently, over the same period, the Zacks Consensus Estimate for full year 2014 widened to a loss of 11 cents from the earlier estimate of earnings of a penny.
Meanwhile, for 2015, the Zacks Consensus Estimate plunged to earnings of 9 cents from the earlier estimated 36 cents, over the same time frame.
Stocks to Consider
While we choose to avoid STAAR Surgical at present, better-ranked stocks that warrant a look in the Medical/Dental-Supply space are Bio-Reference Laboratories (BRLI), Align Technology (ALGN) and AmerisourceBergen Corp. (ABC). While Bio-Reference Laboratories sports a Zacks Rank #1 (Strong Buy), both Align Technology and AmerisourceBergen hold a Zacks Rank #2 (Buy).
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