Advanced Medical Optics (EYE) Purchase Might Create an Abbott (ABT) Buying Opportunity

Reports came out this morning that Abbott Laboratories was purchasing Advanced Medical Optics for $2.8 Billion or $22 a share in cash and assumed debt. Advanced Medical Optics is a California based eye-care device maker with revenues of $1.2 Billion a year and earnings per share of 38 cents. Best known for it's Laser Eye technologies, the company's stock price has declined near 56% over the past 52 week. The purchase price represents more than a doubling of the previous trading day's price.

Paid Too Much?

Overpaying for a poor performer that is overpriced even after a significant price drop does not look like a good business move but Abbott saw something in the device maker that made them offer the premium. Abbott fell on the news today 1.3% on a day with weakness across the board in the markets. The stock has been trending down over the past 3 months but fundamentally looks solid.

Fundamentals

Analysts recently have been looking for better earnings from the company on decent revenue increases. For the current quarter they are now looking for $1.06 per share when they report next vs. analyst's estimates of $1.04 a share three months ago. This is an Earnings increase of 14% compared to the same quarter last year. Revenue continues to climb with year over year growth for 2008 to be 14.2%.

The Trade

With the price/earnings ratio for the company at 13.8 the stock appears to be priced correctly but could see additional weakness with the purchase of Advanced Medical Optics which would create a buying opportunity.