A Tale of Mice and Lens
By Colin Leinster

(FORTUNE Magazine) – Rats and mice with impeccable pedigrees. A high-fashion line of sunglasses favored by the likes of actor Tom Cruise. Sounds like a strange melange, but together they contribute to very rosy earnings prospects for Bausch & Lomb, a Rochester, New York, company that started life in 1853 as an eyeglass store. It now has $698.9 million in annual sales, on which it earned $74.7 million last year. The rodents, bred and sold for laboratory use, and Bausch & Lomb's Ray-Ban shades are both market leaders. So are the company's two other main lines of business: soft contact lenses and saline solutions to clean them. This oddball product mix may be one reason investors have shunned Bausch & Lomb. ''It's not a well-understood company because it falls between the cracks,'' observes Raul P. Esquivel, an analyst at Eberstadt Fleming, a New York securities firm. Then, too, B&L's profits, despite impressive double-digit increases, have been hurt by write-offs from discontinued operations. Management clearly was happy to pay that price for pushing through a major restructuring of the company. An assortment of manufacturing operations have gone, including the company's historical specialty, regular spectacles. It continues to turn out telescopes and microscopes, though they contribute negligibly to profits. Because of confusion about the company's recent metamorphosis, its stock performance has trailed the market, moving from 1982's low of under $17 to a recent $45. With the new Bausch & Lomb essentially in place, the company is attracting buy recommendations from Esquivel and analysts at several other firms; all point to strong management and a strong balance sheet. Without exception, they expect profits to rise as much as 15% for 1987. Eugene Melnitchenko, an analyst with Eppler Guerin & Turner in Dallas, believes that a 15% annual increase can be maintained for the foreseeable future. Many analysts say Bausch & Lomb is dramatically undervalued. Its shares have been selling at a considerable discount to the S&P 500. Melnitchenko thinks they could well reach $60 or more before long. B&L's Charles River laboratory animal subsidiary, acquired in 1983 for $108 million, draws special raves. Meticulous breeding and lab standards have eliminated the viruses common to rodents; that makes the animals especially valuable to medical researchersthe world over for use as guinea pigs, a breed Charles River also raises. Army Air Corps pilots in World War II not to mention General Douglas MacArthur made Bausch & Lomb's Ray-Ban sunglasses famous, but annual sales were sagging when the company signed a $50,000-a-year deal in 1982 with Unique Product Placement of Burbank, California, to move Ray-Bans onto the faces of film and television stars on camera. Since then Ray-Ban shades have appeared in more than 60 movies and TV shows a year. The Wayfarer line, which sold 18,000 pairs before the placement deal, has done especially well. In 1983, when Tom Cruise wore a pair in the movie Risky Business, Wayfarer's U.S. sales soared to 360,000. In 1984 (the debut of television's Miami Vice in which Don Johnson donned them), they reached 720,000. In 1985 (when Bruce Willis put them on for the Moonlighting TV series), 826,000. In 1986 (Tom Cruise again, this time in Top Gun), 1.5 million. Ray-Ban's 40 different lines have about 33% of the hot and growing $500-million-a-year U.S. market for premium sunglasses those with retail prices from $20 to over $100. That's more than double its nearest competitor. Soft contact lenses, a product Bausch & Lomb pioneered, and the saline cleansers it makes for them account for the largest two slices of B&L's revenue pie. The lens business has leveled off in recent years, largely because many people who wear them round the clock have reported various eye infections, analysts say. Profits on lenses have suffered because of price wars; B&L's dropped 13% last year. Even though price slashing is over in the wake of consolidation throughout the industry, fears of infection still hurt sales. Those fears, however, also account for booming profits from cleansing solutions. At Bausch & Lomb they were up 16% in 1986.