Street Takes a Dim View of Advanced Medical Optics

Shares fell Tuesday after the company said the laser vision correction market isn't taking off as quickly as expected

Convincing people not to use glasses is tougher than it sounds. Advanced Medical Optics' (EYE) stock price tumbled Sept. 26, after the company had trouble selling ophthalmic surgical devices and warned of lower than expected revenue in 2006.

The Santa Ana, Calif.-based company said late Sept. 25 that it expects 2006 adjusted earnings per share (EPS) in the range of $1.90 to $1.95, compared to prior guidance of $2.05 to $2.21 EPS. It also said 2006 revenue will be in the range of $1.01 billion to $1.02 billion, compared to prior guidance of $1.02 billion to $1.04 billion.

"Recent market conditions have made it difficult for us to move as quickly as we had planned to improve our sales mix and deliver," said Jim Mazzo, AMO chairman, president and chief executive officer, in a press release.

Surgeons outside the U.S. have been slow to start using refractive implants, which are devices placed into the eye so that you can see better. Advanced Medical Optics now thinks global refractive implant sales will be between $45 million to $50 million, compared to the prior guidance of $50 million to $60 million. Meanwhile laser vision correction procedure sales in the U.S. have also been weaker than expected. And recent strikes by European surgeons who use Advanced Medical Optics' cataract products, as well as government reimbursement pressures in Japan and parts of Europe, have not helped matters.

But CEO Mazzo says that he remains confident in his ability to deliver previous expectations for 2007, given his company's building momentum in sales. He still believes his company's 2007 adjusted gross margin and adjusted operating margin will be around 69% and 25%, respectively. "Our operating costs remain in line, our balance sheet is healthy, our cash flow is growing and we are set to enter 2007 with the strongest pipeline of new products since our spin-off," Mazzo said.

Market players weren't so sure. Advanced Medical Optics plunged nearly 12% to $40.78 per share in early trading on the New York Stock Exchange.

Prudential Financial analyst Larry Biegelsen downgraded the stock to neutral from overweight, warning that the company is too optimistic about 2007. He slashed his $60 12-month stock price target to $48 per share.

Standard & Poor's Corp. kept a buy opinion on the stock, but became more cautious about the company's earnings. Analyst Robert Gold slashed his 2006 earnings per share estimate by 21 cents to $1.93. Keeping his 2007 sales projection at $1.1 billion, he trimmed his EPS estimate for that year by 10 cents to $2.50. (S&P, like, is owned by The McGraw-Hill Companies.)

Amid the mixed opinions on the Street, one thing is clear: The company and investors do not see eye-to-eye on its future prospects.

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