Investing Can Be A Hairy Situation

Includes: ELOS, PHMD, SPB
by: Jenks Jumps

Let's admit it - hair removal is a time-consuming, inconvenient, and repetitive nuisance task. Permanent methods for removal are costly, inconvenient and personally encroaching. Home-use hair removal products are a middle-of-the-road option providing middle-of-the-road results: better than traditional methods but not as good as professional. The market for non-invasive home-use products, including hair removal devices, is projected to be a multi-billion dollar market. The hair removal devices, whether by heat or light, operate by heating the hair. The heat in the hair then heats the hair follicle which is then damaged by the heat. Once damaged, hair tends to grow back slower and thinner.

The no!no! 8800 is the latest model and most prominent product of PhotoMedex (NASDAQ:PHMD). The no!no! branded line is the largest and, to date, only profitable business line in its global consumer unit. The no!no! brand, as of August 2011, has more sales of global home-use products than any other brand. It has sold 3 million products cumulatively. Sales have been primarily in Japan and the United States. Just considering the population of those two countries, 3 million units is not saturation by any means.

Yet, great debate exists about the efficacy of the no!no! hair removal device. The Thermicon technology in no!no! uses only heat so it is claimed to be safe for all skin types and hair colors. However, claims of the product not working as well as claims of burning and cuts abound. Interestingly, even from a no!no! company-authored website, a study evaluating the efficacy of the no!no! results in less than 50% "clearance" or hair reduction after six weeks of specifically-scheduled use. Most negative reviewers are not using the product for six weeks nor are they expecting less than 50% clearance.

A competing product from the Remington line of products owned by Spectrum Brands (NYSE:SPB) is the i-LIGHT Pro, an Intense Pulsed Light [IPL] hair removal system. The i-LIGHT has adapted a similar IPL technology used by dermatologists. Light energy targets the melanin or dark coloring. So, IPL products will not work for everyone, such as those with light hair or with suntans or dark skin tone. Also, IPL products are not FDA approved for use above the neck. The suggested regimen for use is far less demanding than the no!no! requiring only three sessions every other week. Hair reduction after six months is reported at a higher rate than the heat-based product. Negative reviews on the i-LIGHT occur at a smaller rate than positive reviews; as an example, on one site, only 17% were negative. Negative reviewers have a similar list of complaints as the no!no! reviews - not working, burning and redness, and the brightness of the light. Likewise, unrealistic lengths of use and expectations seem to be the culprits of the dissatisfaction.

Syneron Medical (NASDAQ:ELOS) will launch its first home-use device in the U.S., a hair removal product, in the first quarter of 2013. Syneron claims the "me" Home Use Hair Removal System will deliver the fastest performance in the market. The "me" uses Syneron's proprietary, patented elos technology which combines Intense Pulse Light [IPL] and Radio Frequency energies. The combination of the two technologies addresses the issues of IPL systems not working on light hair or dark skin tones. The "me" system has been available in Europe since 2011.

From an investor's perspective, the actual efficacy of home-use hair removal systems may not be the ultimate determinant in whether to invest in a stock. But, when the reports on product efficacy are indecisive, a deeper dive into the companies selling them is advisable.

PhotoMedex and Radiancy, actually the original proprietor of the no!no! hair removal systems, combined for a reverse acquisition in 2011, with Radiancy being treated as the acquirer. In a reverse merger-acquisition, a private company and public company merge allowing the private company to become publicly traded. This combined company now provides aesthetic solutions end to end for all three applicable markets - dermatologists, aestheticians and the retail consumer. PhotoMedex holds 212 patents and trademarks on its proprietary products for skin conditions and diseases. PhotoMedex's experience in the medical industry is a competent base for its development of product for the spa industry and for home-use.

Regarding geography, PhotoMedex has distribution relationships worldwide with 5,000 outlets in 55 countries. Home-shopping channels and online retail websites offer direct sales to the home consumer. But, only 28% of current total revenues are derived internationally. So, geographical expansion still holds immense opportunity. PhotoMedex is committed to ongoing development of skin health drugs and devices that are both safe and efficacious. Unique opportunities still exist, as well, for drug/device combination treatments. Existing products developed for the medical field can also be adapted for aesthetic and home use. There is also room for existing products to be extended for further usage. Recognized treatments for skin conditions may require clinical studies to gain FDA approval, insurance coverage and market acceptance.

The merged PhotoMedex appears to have stabilized well. Radiancy had a developed and successful direct-to-consumer marketing program. PhotoMedex had an established direct sales force. Radiancy had successfully adapted professional technologies into products for home-use. PhotoMedex had products and technologies prime for adaptation and repackaging for home-use. In the first two quarters of 2012, the merged PhotoMedex did not meet earnings estimates. Yet, in the third quarter, it not only beat estimates but also raised guidance for the fourth quarter and did so when guiding downward was not a surprise. It now has $55 million in cash and no debt.

Spectrum Brands, Inc. offers a portfolio of widely-recognized consumer staples. Spectrum operates three segments: Global Batteries and Appliances, Global Pet Supplies and Home & Garden. Spectrum operates in 140 countries and has strong relationships with major retailers. Spectrum's value model aims to provide the "same performance" at "less price" for a "better value" to the consumer. It actually focuses on being #2 in market position. Spectrum has a noteworthy track record of integrating acquisitions quickly and synergistically.

Its Global Batteries and Appliances segment has a recognizable footprint with brands such as Rayovac, Black & Decker, George Foreman, Remington and Farberware. The product catalog is recession-resistant as it primarily contains everyday-use products with attractive replacement rates. Spectrum Brands is the only company to have a global footprint in the pet supplies segment. The segment has low seasonality and is seeing stronger numbers in pet ownership and spending per pet. The Home and Garden segment includes household names such as Hot Shot, Spectracide, Black Flag, and Repel. As outdoor living becomes a hotter trend, Spectrum has few competitors. Spectrum's latest acquisition of HHI adds brands such as Kwikset, Stanley Hardware and Pfitzer and thus products such as locksets, hardware and faucets to its portfolio.

Spectrum Brands is initiating a dividend in 2013 as a commitment to deliver shareholder value. Spectrum is specifically targeting for earnings before interest, taxes, depreciation and amortization (EBITDA) to increase at a faster rate than annual sales. Spectrum's share price hit a 52 week high of $51.22 on January 30th and appears fairly valued.

Syneron Medical is the largest global distributor of aesthetic devices to the professional aesthetic market holding 32% market share. Syneron distributes professional product under two brands, Syneron and Candela, in 90 countries and is rapidly pioneering new treatment categories such as fat reduction, body contouring and skin tightening. Specifically, Syneron has tracked a staggering shift for preference in non-invasive procedures. Cosmetic procedures have gained social acceptance and volumes are expected to grow at least 68% in the five-year period from 2011 to 2016. And, the revenue stream is expected to grow more than 15% per year.

Significant opportunity is also emerging in home-use devices. The focus of its emerging business unit includes hair removal, skin rejuvenation, teeth whitening and skin lightening. In the third quarter of 2012 alone, the revenues increased 37% . By 2016, Syneron estimates hair removal and skin rejuvenation will generate over $650 million. In the same timeframe, teeth whitening and fluorination will generate over $5.5 billion. Staggeringly, skin lightening is expected to generate over $10 billion. Skin lightening is widely used in Asia, where it represents 90% of the market. Skin lightening is a daily-use product which means attractive recurring revenues.

Syneron is debt-free with $116 million cash on hand. It is already expanding its recurring revenue stream with professional consumables. Earnings per share transitioned from being negative in 2011 to profitability in 2012 with estimates for 2013 growth of nearly 250%. Calculating a YPEG value using analysts' five-year EPS growth estimate of 35% equates to $23.10 - more than double the current share price.

Between PhotoMedex, Spectrum Brands and Syneron Medical, there may be an attractive option for every type of investor. Spectrum is an established company offering a balanced and diversified portfolio of products far beyond just hair removal. It has proven the ability to target and integrate complementary acquisitions. With Spectrum becoming a dividend-payer, its future looks steady and doesn't look all that hairy. PhotoMedex has an established direct-to-consumer program. It has plenty of room for expansion and can continue developing skin health products based on medically-sound technologies. With healthy growth estimates and a relatively undervalued share price, its future has opportunity and doesn't look too difficult. Syneron Medical may have the better hair-removal product of the three. It has a solid foothold in the professional aesthetic market especially regarding cosmetic procedures. As it branches into the home-use market, it also has identified plenty of opportunities and its future is looking less and less hairy.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.