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Well, at least we didn't buy it. Nancy

Fool Plate Special 
Feb 23, 2000
An Investment Opinion 
The Changing Face of VISX 
By Brian Graney 
February 23, 2000 
Refusing to close its eyes to the reality that its competitive market
position is changing for the worse, laser vision correction systems maker
VISX Inc. (Nasdaq:VISX <http://quote.yahoo.com/q?s=VISX&d=t> - news
<http://biz.yahoo.com/n/v/visx.html>) late yesterday announced what it
termed an "aggressive program" to make its eye correction procedures more
affordable to vision-impaired consumers. What specifically caught the
market's eye was the company's decision to reduce the per-procedure royalty
it receives from customers using its technology to $100 from $250. While
good news for consumers, the price cut was viewed as bad news for VISX,
which dropped some 25% this morning to a new 52-week low. 
The market reacted in various ways to the news, which was not wholly
Rival Summit Technology (Nasdaq:BEAM <http://quote.yahoo.com/q?s=BEAM&d=t> -
news <http://biz.yahoo.com/n/b/beam.html>) followed VISX downward with a big
loss of its own today as investors feared that falling prices will end up
hurting the margins of all laser vision correction systems makers.
Meanwhile, vision correction centers operator LCA-Vision (Nasdaq:LCAV
<http://quote.yahoo.com/q?s=LCAV&d=t> - news
<http://biz.yahoo.com/n/l/lcav.html>) gained ground, mostly because its
business is less of a margin story and is more dependent on the overall
acceptance of laser vision correction and relative procedure growth.
Analysts were quick to issue their opinions, with Dain Rauscher Wessels
calling the price cut "shocking" and Lehman Brothers chiming in that VISX
had done the "unthinkable." 
What was really unthinkable, however, was that the well-recorded two-year
value explosion in VISX could continue ad infinitum without a hitch. From
the market's point of view, much of the bad news that VISX's competitive
positioning in the market was coming under assault had already been priced
into the stock. Prior to today's shellacking, the company's shares had
dropped nearly 80% from their highs last July as VISX first suffered
htm> on the patent protection front and then reported a sequential Q4
revenue slide. At its current price, VISX is trading at a little under 13
times last year's EPS of $1.35, a far cry from its 110x trailing multiple at
its height last summer. 
While it is tempting to think of VISX's slide as simply an instance of rapid
multiple contraction for a market darling that get too ahead of itself, such
reasoning would be simplifying matters a great deal. Rather, investors
should take away the lesson of how important a perceived competitive
advantage period, or CAP, is to a company's valuation. 
Ideally, investors should be looking for long competitive advantage periods,
or what Warren Buffett has referred to as companies that have moats around
their businesses that are wide, deep, and full of alligators. When the CAP
is viewed as sustainable or, better yet, growing over time, companies will
be rewarded with higher valuations. When the CAP is evaporating, as it is
for a company like VISX, the valuation can head south in a hurry. Sure,
future cash flows at VISX are under the gun, too. That is also playing a
role in company's slide. But the effect of the changing CAP is where
investors looking at VISX should focus their attention right now. 
"The United States market for laser vision correction has reached a critical
juncture," VISX chairman and CEO Mark Logan said in yesterday's press
release. So too have long-time VISX investors. Obviously, the old models
that had lent support to a purchase of VISX in the past have now lost a
great deal of their prior relevancy. Coming up with new models will be a
challenge, but it's a situation that all long-term investors should expect
to encounter at some point with all of their holdings. For an investment in
VISX at these levels to pay off handsomely down the road, investors must now
see something in the company that the conventional wisdom is missing. 
Related Links: 
*	Fool Plate Special, 12/7/99: VISX Gets Sliced
*	Dueling Fools, 9/15/99: V ISX
*	Michael Mauboussin, et.al.: CAP, The Neglected Value Driver