Jack McKay. April 16, 2008.
The aesthetic medical industry's positive demographic trends have long captivated investors, but industry growth has slowed recently as competitive pressures and a difficult macroeconomic environment have eroded sales and profits. Still, Syneron's $400 million market cap doesn't adequately reflect Syneron's $204 million cash and its $45 million annual cash flows.
Syneron Medical Ltd. (NASDAQ: ELOS) develops and markets medical aesthetic devices. The company is based in Israel, and the majority of sales occur in the United States. According to Syneron, their elos (electro-optical synergy) technology “harnesses the power of bi-polar radio frequency (RF) and optical energy (either laser or light) for unprecedented precision and safety. The advantages of elos technology has been positively reviewed in over 40 clinical papers and realized in medical aesthetic practices around the globe” (-Syneron). Syneron has provided more than 6000 for clients in 50 countries. Shares have traded between 13.35 and 27.39 over the past year, and currently trade for $15.01.
Operations
Syneron products Velasmooth, Velashape, and its laser-assisted liposuction product target the body shaping markets. Syneron’s laser-assisted liposuction product was optimized from the company’s surgical laser platform, which can be used in the future for other applications. This surgical laser platform is separate from the company’s standard elos platforms (eLight, eLaser, eMax), which are used in conjuction with Syneron’s RF, IR, and laser devices.
In 2007, Syneron successfully launched the Velashape and Matrix IR products. Also in 2007, the company signed an agreement with Proctor and Gamble to become the exclusive developer and supplier for home-use devices for skin improvement. This development confirms Syneron’s stated intention to convert to a more service-based business model (to enable more consistent and recurring revenue streams). In 2008, Syneron will launch the Matrix RF applicator (whcih integrates with the aforementioned “eLine” Syneron platforms) which emulates a “broad range of ablative lasers” (-Syneron). Syneron has also announced that the company will continue to direct research and development spending for the coming year to its core, high-growth market segments of body shaping and skin rejuvenation.
Financials
Syneron was founded near the end of 2000. In 2002, Syneron recorded 11.5M in sales. Just four years later in 2006, sales had grown tenfold to 117M. For FY 2007, sales grew 21 percent to 141M. In 4Q 2007, Syneron reported record sales of 38.1M. Syneron estimates 2008 sales at 155M, growth of 10 percent.
Syneron has grown cash flow even while spending significantly on research and development (12.5M in 2007), and dramatically increasing selling, general, and administrative costs (70M in 2007 from 29M in 2005). Free Cash Flow (Cash from Operations minus Capital Expenditures) totaled 45M in 2007, compared to 37M in 2006 and 31M in 2005. Year-over-year cash flow growth has never dropped under 19 percent in the company’s history.
GAAP earnings totaled 31M in 2007, while non-GAAP earnings were 38M. The difference is mostly attributable to writeoffs of auction-rate securities. In 4Q 2007, non-GAAP earnings were a solid 10.6M. However, as shown, earnings have always lagged cash flow. Syneron is eligible for sheltered tax status under Israeli law - the company will only pay taxes between two and four percent until 2014. In 4Q 2007, the company’s board of directors authorized a 50M stock repurchase program. During the fourth quarter, Syneron bought back almost a half-million shares worth 7.2M. The shares were purchased at an average price of 15.45.
With the company’s current market cap of 417M and cash of 204M, Syneron trades for just 5 times its trailing twelve months free cash flow.
Conclusion
Investors rewarded Syneron’s sterling growth in its infancy with an inflated share price and amplified expectations. Since, competitive pressures that have slowed sales and earnings growth and an increasingly difficult macroeconomic environment that has raised concern over consumer demand for expensive procedures have dampened investor sentiment regarding Syneron. Just as investors overcompensated for Syneron’s successes on the ride up (shares traded for over $40 in 2005 after trading for $11 the previous year), investors have overcompensated in response to Syneron’s recent performance, bidding down shares to $14 after trading for $27 less than a year ago. Meanwhile, the company’s continued solid performance “where it counts” received scant attention. Syneron has gained market share and grown cash flow while competitors fizzled. Indeed, Syneron’s recent 4Q 2007 report, showed a 21M cash from operations figure, lifting shares up to today’s price ($15.01).
While competitors may continue to erode Syneron’s sales and earnings growth, Syneron has shown the ability to adapt and thrive. High research and development expenditures allow a steady stream of new product introductions, and a high marketing expenditure allows for increased selling opportunities. The agreement with Proctor and Gamble shows the company’s dedication to converting to a more service-based business model. Any continued pressure in the aesthetic laser field will affect other companies more than Syneron. In fact, continued pressure may force consolidation of smaller fish in the aesthetic laser industry, which would be considered a positive for Syneron. Also, buyouts of firms in Syneron’s field are increasingly likely, as several companies’ share prices approach cash levels, which makes them attractive investments for larger companies. Syneron’s other main risk factor, the U.S. economy, already is overly reflected in the current share price. I see future economic shifts being in Syneron’s favor, as a recession is already more than priced in, while economic growth would unlock tremendous upside. Also on the positive side, long-term demographic and societal trends (aging baby-boomer population and increasing focus on beauty and good skin) bode well for Syneron.
At today’s price of $15.01, Syneron shares trade for fewer than five times trailing free cash flow. I recommend buying shares of Syneron, the Israeli cash machine.
Key Stats:
Market Cap: $417 M
Cash: $204 M
Trailing Operating Cash Flow: $48 M
Trailing Free Cash Flow: $46 M
Trailing Earnings: $31 M
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