Wednesday, March 01, 2006

All We See Is a Disaster: Baush & Lomb

It's funny how Baush and Lomb (BOL) operates in the eye care business, because lately, all they've been doing is throwing up dust and clouding investor's vision.

We are starting coverage on the contact lens and lens care specialist with a sell rating. Our decision is based on 2 themes.

One, management continues to vex us. They have not done enough on the R&D side, and the recent tax irregularities at a Brazilian subsidiary are simply unpardonable. They may, in fact, portend further internal shortcomings, given the fact that Baush and Lomb's top execs have lucrative pay contracts (and dynamite severance packages to go along with them). We just aren't getting any good vibes from the corner office.

Fundamentally, BOL is still raking in strong free cash flow, but we cower when we look at those stagnant sales and margin figures. The escalating popularity of disposable contact lens is eroding Baush's competitive position. Don't let Baush's recent acquisition of CT Freda -- or its recently improved debt ratings -- fool you. Sales are soft and Baush may be morphing into a yester-year, if it hasn't already.

Baush's rivals, in the meantime, are better seated to weather changing consumer trends. Diversified healthcare name Johnson and Johnson (JNJ) enjoys iconic brand status and a shareholder-friendly track record to cushion it against tough times. Alcon (ACL) is simply kicking butt -- as the eye care leader in a $12B category, the only blunder Alcon's done, in our opinion, is overhype analysts on guidance calls. When Alcon reported results a couple of weeks ago, investors butchered the stock.

But Alcon's still the play to keep an eye on. Unlike Baush, Alcon is sucking up market share and boosting figures across the board: cash flow, margins, and sales -- all up. Alcon spits out 4x the ROE and 2.5x the operating margins Baush brings to the table. Alcon recently bounced off a key support level, possibly indicating that the dust is clear and it's time to begin buying again.

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