Bausch & Lomb: Cast a Cautious Eye
To a blurry eye, Bausch Lomb's beaten-up share price might look like a buying opportunity. If your vision is clear, it's not.
The stock (symbol BOL) has plummeted 20% since Monday, when the company said it would temporarily stop shipments of its ReNu with MoistureLoc contact lens solution. The reason: fear that the product might be connected with a rare fungal eye infection. The stock market could be overreacting. It did, after all, do just that to Sherwin-Williams in February after a jury found the company liable in a lead-paint case. That stock lost one-fifth of its value in a single day. But it has recovered almost fully as the market reassessed the implications to Sherwin-Williams' businesses and found them less than dire.
However, with Bausch Lomb, savvy investors would be wise to hold off rather than expect a quick bounceback, analysts say. Although there's no evidence that the infections are caused by the firm's product, the uncertainty is great and the full implications unknown.
The Centers for Disease Control and Prevention is investigating several reports of Fusarium keratitis infections. The cause of the infections has yet to be determined, "although evidence thus far remains concerning" for BL, says Suey Wong, an analyst at Robert W. Baird Co. Nearly all of the infected patients so far reviewed by the CDC have said they used ReNu products. How long the investigation will take isn't clear. But in the meantime, the brand name is tainted. Major retail chains are pulling ReNu products from their shelves.
This is a big deal for BL. It generates 23% of its sales from lens-care products, sold under the Bausch Lomb, Boston, ReNu and Sensitive Eyes names. It launched ReNu with MoistureLoc in 2004. Bank of America analyst David Maris says that brand isn't likely to return to the U.S. market, resulting in the loss of $45 million in potential sales this year. He figures BL will lose share of the overall lens care market and that its contact lens sales could be hurt as well. "We think the brand damage on ReNu will be sizable and carry over into the Bausch Lomb overall brand globally," he says. On Wednesday, Maris lowered his 2006 earnings per share estimate from $4.24 to $3.05. He also lowered his 12-month target price for the stock from $49 to $40 and maintains a "sell" rating.
Maris also wonders what the company will say to some questions about its handling of the situation, including why doctors weren't notified sooner and the timeline wasn't explained better to investors. Such worries could add to the long-term problems for the firm, in his view.
BL has more worries than ReNu. Competition among eye-care companies -- including Johnson Johnson, Alcon and others -- is tough. Analysts acknowledge that BL hasn't invested enough in research and development, resulting in a weak product pipeline. Wong, who rates the stock "neutral," points out that a recent accounting scandal at a subsidiary in Brazil caused the company to restate five years of financial results and that accounting at a Korean subsidiary is also under investigation. BL said this week that it would further delay its 10-K filing.