Shamir Optical: In the Public Eye

The U.S. National Eye Institute estimates that eye care—including eyeglasses, contact lenses and corrective laser and traditional eye surgery—for treatment of nearsightedness, farsightedness and astigmatism (an irregular curve of the cornea) is a $25 billion annual market in the United States.

According to The Vision Care Institute, a Johnson & Johnson company, two-thirds of American adults wear prescription eyeglasses, which are alone account for more than half of that market.

One segment of the marketplace that is expected to grow with our aging population is challenging prescriptions such as the relatively new progressive lenses, often referred to as “invisible” bifocals or trifocals, because they lack the tell-tale dividing line that splits traditional bifocal lenses. Progressives offer several strengths in a single lens, providing constant graduation that allows wearers a smooth range of vision in far, intermediate and close-up (reading) distances.

The growing popularity of progressive lenses should play right into the hands of Israeli lens manufacturer Shamir Optical Industry (Nasdaq: SHMR). Shamir utilizes proprietary technology to develop, design, manufacture and market progressive lenses to the ophthalmic market (the likes of LensCrafters, Pearle Vision and D.O.C. Optics chains, all of which are now owned by Luxottica, a large Italian eyeglass frame maker).

With a market capitalization of only about $110 million, Shamir has flown under the radar of most investors, which isn’t a bad thing, given its stock’s flirtation with record lows this year. The company debuted on the Nasdaq in March 2005, hitting a record high of $17.90 shortly after its IPO and the stock has trended down ever since. Like many other consumer discretionary stocks—the sector of products and services people want but don’t necessarily need—the economic downturn, a sagging housing market, and high energy prices haven’t helped Shamir.

But after months of losses, the lens company finally has something to get excited about. For the quarter ended June 30, 2008, Shamir reported revenues increased by 25.4% to $37.1 million, compared to $29.6 million in the same period last year. Gross quarterly profits rose by 28.9% to $20.1 million, compared to $15.6 million in the year-ago quarter. Net income came in at $2.6 million, or $0.16 per diluted share, a 29.8% leap over the comparable period in 2007. The outfit expects revenue growth of between 10% and 16% in 2008, on projected strong sales. In the second quarter, Shamir saw sales in the U.S., Europe and the rest of the world increase year-over-year by 20%, 16% and 71%, respectively.

And the lens maker may see better days in the future. It is setting its sights on capitalizing on problems associated with aging eyes: Specifically, presbyopia, the inability to focus on objects up close, which affects virtually everyone who reaches middle-age. Shamir is also planning to broaden its reach in key markets like Europe, by swallowing local competition and setting up new labs and marketing platforms. And it hopes to break into new markets, like Central and South America (it already has an operation in Mexico), Eastern Europe and Asia, places with low penetration and high-growth potential.

Chief executive officer, Eyal Hayardeny, believes the company has made significant inroads in the U.S. and Europe, specifically noting fact that Shamir has recently expanded their European distribution network by purchasing the remaining 49% interest in Altra Trading GmbH, a German distributor and holding company, from its minority shareholder (Shamir already held a 51% share the company, through which it holds all of its European subsidiaries including the U.K., France, Spain, Portugal and Turkey). With the announcement of the buyout, Hayardeny said: “Shamir is committed to increasing its footprint in Europe and it continues to make appropriate investments in leadership, marketing and sales.”

Eyeing the future, Keay Nakae at Collins Stewart, who has a “buy” rating on Shamir’s stock, is keen on the company’s prospects, indicating his firm believes that in the long run, Shamir’s strategy to drive growth through organic and acquisition initiatives “will prove to be beneficial.” In an August 22 research update, the analyst said: “The company beat both our estimate and consensus for the seventh consecutive quarter…Revenue growth was driven by stronger than expected lens sales in all geographies.” He added: “Our 12-month price target of $10.00 is based a forward P/E multiple of 17.9x our forward EPS estimate of $0.56, which represents a 32% discount to our peer group of small cap medical device companies.”

While Shamir is already relatively well known to eyeglass chains’ in-house optometrists and opticians, so far, only two Wall Street pundits track the stock. But that will quickly change if the company makes a habit of its most recent financial results. And while only time will tell if Shamir will attract the attention of serious investors, if all goes as its top brass plans, this small cap could experience some eye-popping growth over the long haul.

Be sure and keep a close watch on this one!

Shannon Roxborough
Analyst, Medtech Millionaire