Hold Advanced Medical Optics

Advanced Medical Optics, or AMO (EYE) reported Q4 EPS that beat our estimate by $0.03 on sales that significantly exceeded our forecast. Due to a slowdown in the U.S. economy that is negatively impacting the elective refractive procedure market, management revised its 2008 guidance downward again. This guidance includes plans to cut fixed costs in manufacturing and SG&A [sales, general and administrative] operations to provide some support to earnings growth and maximize cash flow in a weak economy.

We lowered our FY08 sales and EPS estimates and initiated FY09 estimates. Our price target of $25.00 per share is based on roughly 19x our FY08 EPS estimate. Growth in 2008 is expected to be negatively impacted by the May 25, 2007 recall of the COMPLETE multi-purpose solution and by an elective refractive procedure market that is declining in the U.S due to the slowdown in the economy.

In a declining market, AMO expects to continue to outperform the U.S. laser vision correction market with the support from multiple growth drivers. The continued success in the recovery of the eye care business from the launch of Complete Easy Rub provides additional support to the weaker growth. Given these factors, we believe the stock is fairly valued around 1.3x P/E/G.

Read the full analyst report on EYE.

Read the full analyst report on EYE