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Here's Why You Should Hold on to National Vision (EYE) for Now

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National Vision Holdings, Inc. EYE is gaining from new store openings for its America's Best and Eyeglass World brands during the third quarter of 2021.The company’s plans to invest in television advertising and digital marketing buoy optimism. A stable solvency position also bodes well. However, mounting expenses and tough competition raise apprehension.

Over the past year, this Zacks Rank #3 (Hold) stock has charted a solid trajectory, appreciating 2.1% compared with 3.6% fall of the industry and 29.7% rise of the S&P 500 composite.

The renowned U.S. optical retailer has a market capitalization of $3.97 billion. Its third-quarter earnings surpassed the Zacks Consensus Estimate by 52%.

The company’s long-term expected growth rate is pegged at 22.2%, which compares with the industry’s growth expectation of 17.6% and the S&P 500’s estimated 11.7% growth.

Zacks Investment Research
Zacks Investment Research

Image Source: Zacks Investment Research

Let’s delve deeper.

Factors at Play

Growth Strategies Look Promising: National Vision plans to continue executing on core growth initiatives and further investments to strengthen competitive advantages, raising our optimism. The company had a strong start with 14 openings in the third quarter. During the third-quarter earnings update, the company noted that it has the potential to nearly double its current store footprint with two attractive growth engines in America's Best and Eyeglass World. The company has a solid pipeline of specific locations to open new stores for 2021 and 2022, as its lab network remains well-positioned to meet the projected 2021 requirement. The company is also focused on investing in television advertising and digital marketing.

Encouraging New Store Growth: We are upbeat about National Vision’s new store openings during the third quarter. The company opened 14 new America's Best stores and two Eyeglass World stores with a total of 1,262 stores to date, up 5.1% from the year-ago tally. The America's Best and Eyeglass World growth brands combined, the unit increased nearly 7% in the past year. The company opened 59 new stores year to date and had plans to open 75 new stores during 2021.

Stable Solvency Position: National Vision exited the third quarter with cash and cash equivalents of $431.9 million. Meanwhile, total debt came at $620 million, much higher than the year-end cash and cash equivalent level. However, the company has $4.4 million of short-term debt on its balance sheet at the end of the third quarter. This is good news in terms of the company’s solvency position as at least during a year of economic downturn the company has sufficient cash for debt repayment.

Downsides

Escalating Costs: During the third quarter, National Vision’s selling, general and administrative expenses increased 14.5% year over year. The increase was caused by higher stock compensation expenses, increased performance-based incentive compensation and higher advertising investment. The company’s escalating expenses are exerting pressure on the bottom line.

Tough Competition: National Vision operates in a highly competitive optical retail industry. The companies within the industry generally compete based on recognition of the brand name, price, convenience, selection, service and product quality. Competition exists in physical retail locations along with e-commerce platforms.

High Dependence on Vendors: National Vision procures almost all its merchandise from domestic and international vendors. Moreover, the company has ties with a very limited number of suppliers for the majority of its eyeglass frames, eyeglass lenses and contact lenses. Thus, high dependence on a limited number of suppliers exposes it to the concentration of supplier risk. The company may find it difficult to find an alternative source of procurements in a timely or cost-effective manner during tough times.

Estimate Trend

The Zacks Consensus Estimate for National Vision’s fourth-quarter earnings is pegged at 24 cents, suggesting a 46.67% fall from the year-ago reported number.

Meanwhile, the Zacks Consensus Estimate for its 2021 revenues is pegged at $2.1 billion, suggesting a 19.83% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are Apollo Endosurgery, Inc. APEN, Cerner Corporation CERN and West Pharmaceutical Services, Inc. WST, each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apollo Endosurgery has a long-term earnings growth rate of 7%. The company‘s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry in the past year. APEN has gained 132.2% compared with the industry’s 12.6% growth.

Cerner has a long-term earnings growth rate of 13.3%. The company’s earnings surpassed estimates in the trailing three of the last four quarters and met estimates in one. Cerner has a trailing four-quarter earnings surprise of 3.2%, on average.

Cerner has outperformed its industry in the past year. CERN has gained 19.5% against the industry’s 38.2% decline.

West Pharmaceutical has a long-term earnings growth rate of 27.6%. The company’s earnings surpassed estimates in the trailing four quarters, delivering an average surprise of 29.4%.

West Pharmaceutical has outperformed its industry in the past year. WST has rallied 64.2% compared with the industry’s 17.1% rise.


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