Syneron Medical (ELOS) Update – Now a Growth and Value Investment
Folks who have read my blog earlier know that I am very bullish of Syneron Medical (ELOS) and have my money where my mouth is – maybe even a lot more than how much should be in one stock. I have received a number of questions on my thoughts on ELOS now that it has shed more than 50% of its value and if I am still holding on to the shares and I have seen my previous post on ELOS being actively discussed in StockArena.com, the Yahoo! Finance message boards, SeekingAlpha and other sites. Before I revisit ELOS and why I am still bullish on the stock and probably even more than before, let me say "YES", I still hold all my Syneron Medical shares and have either taken assignments on the naked put positions or rolled them forward to a Jan ’07 expiry. This is an investment and the only way to lose money on ELOS now would be to sell in panic or sell hoping to make the loss up through another equity. Its been 3 months since the last discussion on ELOS and there have been a few significant events in this time frame:
First, on March 7th, CIBC who started the downturn in ELOS by cutting their rating on ELOS from Sector Outperform to Sector Perform on Dec 30th, came out with the upgrade and reversed their stance from a Sector Perform to a Sector Outperform and slapped a $40 price target on March 7th on really no new news.
The essence of that analyst report:
As of 3/06, we are raising our opinion on ELOS to Sector Outperform from Sector Perform due to feedback from the AAD that the market is remaining surprisingly strong. Syneron is also launching a new e-Line of laser and light source products for skin tightening,
non-ablative photorejuvenation and hair removal.
- This new family of products consists of the eLight, eLaser and eMax and is being launched here at the
- In skin tightening, the eLight product, which combines intense pulse light with RF, is expected to allow Syneron to compete more effectively with the Titan product from Cutera (CUTR-not rated).
- We applied a 20X 2006 P/E multiple to our EPS est. of $2.00 to derive our $40 price target ELOS shares have been punished since the 4Q05 disappointment, but we believe the stock will begin to trade back toward the peer group avg. with these new products and market opportunities.
It is encouraging that CIBC whose “channel checks” suggested issues with sales came back within 3 months and have been thumping their table on ELOS.
On March 31st, they came out with a follow-up report titled: Syneron Medical Ltd.: Update on ELOS' Deferred Revs; We Would Buy - Stock's Too Cheap In Our View but didn’t just stop there, and on April 27th in their report titled: Syneron Medical Ltd.: Management Change to Be Smooth Transition; Sales Force Intact expressed a lack of concern on the management changes announced and reiterated their Sector Outperform rating on ELOS and went ahead to write:
We view today's weakness as a buying opportunity, as the stock now trades at 14X our 2006 EPS
estimate versus the peer group average multiple of 28X.
- The stock is off today after the company announced that its President of
- Based on our channel checks, we believe ELOS will hit consensus revenue estimates of $24M for the quarter, we expect guidance to remain the same for the year at $113-$120M, and we think the company should have a good second quarter given the recent launch of the eLine of products. As noted in the company s press release, Mr. Serafino's intention is to return to Syneron and work in the strategic planning and business development area. The recent changes in the global sales and marketing initiatives in the company may have also contributed to his decision.
We understand that there has been no unusual turnover at the company in sales. We spoke with the company, and it currently has 56 sales reps in place, up from 40 at the end of 4Q05. This is actually ahead of the company's guidance to have 55 reps in place at the end of 1Q06.
We believe that Syneron is attractively priced here, trading at half its peer group multiple, and we like the company's product pipeline.
The stock though is clearly in a rut and has not reacted to these positive reports as it did it to CIBC’s initial negative report. And I do not know when the turn around will begin and so those looking for a quick short term move may not be interested in ELOS but those who are looking for a solid investment should consider ELOS not only a great Value play with the stock trading at more than a 50% discount to its peer group, with results that are at the upper end of this peer group but also the growth play that it was when the previous article on ELOS was published on this blog – nothing has really changed dramatically in their growth story though clearly growth has slowed to 28% and that has some investors concerned.
I would like to also point to readers to another article - Growth Vs. Value – Real Distinction or Not? An excellent article that discusses the fact that some stocks like ELOS are value stocks trading a deep discount to their real value, but are also growth stocks at the same time. The author considered ELOS undervalued by about 30-40% to what he calculates as the true value of his stock and this was when ELOS was trading at $26. In other words ELOS is currently trading at about a 50% discount to his fair value.
So if this stock can double, then why is it stuck in that rut and achieving new 52-week lows every week? A couple of reasons:
- Stocks move on more than just fundamentals. In ELOS's case the discount in stock price can be attributed to management incompetence. As we know, they missed Q4 revenue estimated by $3M and that did not show up in Q1 as they missed again. But they have not taken down their guidance and are not following a UPOD (under promise over deliver) strategy. In fact management came out and raised guidance and in Q1 delivered results which were a little ahead of the original estimates but fell short of their “mis”guidance. So this stock is probably going to remain beaten down until ELOS delivers on a couple of good quarters meeting/beating estimates and we get a few strong upgrades. In other words, management needs to regain credibility.
- In addition to missing their guidance and management credibility issues, there is the fear of discretionary spending in a recession. ELOS targets baby boomer vanity and folks may not be spending on discretionary items like cellulose when they are facing a recession. This is a fundamental risk of investing in Syneron Medical - this is a good economy stock, the market conditions are not favorable right now for ELOS and we need for that to improve and hopefully for baby boomers to live up to the vanity we expect them to demonstrate.
So though it seems nonsensical for the company to earn more than originally anticipated (but less than the revision) and yet trade for less than it did before the revision, there are at least a couple of reasons for the same. ELOS now needs to prove itself and regain credibility over the next 2-3 quarters. If they deliver on their numbers I can't imagine that the stock will not go up, especially with the prospect of some huge new product releases in 2007. The company has great margins – 47%, its technology offers a concrete differentiating factor, its target market should keep growing at a brisk rate over the next decade, it is growing at 28% and is trading at a P/E of 11.
ELOS may not be a sure thing, because I can see the case where everything goes wrong for the company (after all they have missed numbers 2 quarters in a row now and management credibility Is under serious questioning), but I think the risk-reward is about 90-10 in favor of the long investors - a bet I am willing to take as of today.
I will be watching this company closely and making sure they are not falling short in any of the big assumptions being made in classifying this as an investment for the future and I suggest other readers who invest in ELOS do the same. The company does still show a healthy 69% institutional holding as of
- As of May 2006, Fidelity owns 14.5% of shares, more than triple what they owned in October 2005
- Timessquare opened a new position with 1,239,500 shares
- Barclays International added almost 1M shares to their holdings
- 4,161,856 reported shares are short, the highest in 12 months
To conclude, I remain Long and Bullish on ELOS, with the assumption that the sales and marketing costs they incurred in Q1 will help sales and revenues in Q2 and beyond and is a worthwhile investment. The CIBC analyst seems to agree.
Disclosure: I maintain my “very” long position in ELOS and yes, it is hurting but I remain bullish on the company and am hoping for a recovery late 2006, 2007.
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posted by Retail Investor at 5/20/2006 08:04:00 AM
1 Comments:
Nice write-up on ELOS. Thanks.
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