Wednesday, November 29, 2006

Contact Shot

1-800 Contacts (CTAC) $16.16

As noted in TheStreet and StreetInsider LaGrange Capital has disclosed a12.6% stake in 1-800 Contacts as well as taking a board seat at the direct contact lens supplier. We have followed events at this company for some years on the basis that a direct low-cost player ought eventually to create value.

Sadly, it hasn't panned out that way. CTAC has been hampered by a lack of product as the major lens manufacturers are not keen to supply it and annoy the retail opticians who are their main customers (and CTAC's high cost competitors). The main manufacturers are Johnson & Johnson (JNJ), Novartis (NVS), Bausch & Lomb (BOL) and Cooper (COO). There are also new legal restrictions that make it more difficult to supply lenses without a prescribing relationship. Moreover, CTAC's results have been dragged down by huge losses at its ClearLab manufacturing subsidiary.

The up news is that CTAC has decided to part company with ClearLab in a way that has not yet been decided but which will presumably stem the red ink. It is therefore possible to see if there is value in a sum-of-the-parts exercise. Best case is that they get rid of ClearLab at no cost, (which is optimistic). The remaining operations have an operating profit of $22m, forecast by the company to grow to $23-26m next year. Deducting interest and tax nets the common shareholders c.$14.6m or or $1.09 eps. So the best case p/e is 14.8 on next year's clean earnings.

We would leave alone until the ClearLab situation is costed and capped, and standalone growth is proven.

Disclaimer: No positions held

Stocks mentioned: CTAC, JNJ, NVS, BOL, COO

No comments: