Syneron: A Wildly Profitable Company (ELOS)

| About: Syneron Medical (ELOS)

Apparently, lasers can do pretty cool things besides kill bad guys in outer space. Syneron (Nasdaq: ELOS) uses them to make machines that rejuvenate the skin’s appearance, remove body hair, reduce wrinkles, treat acne, improve leg veins, and temporarily better the appearance of cellulite. The company is the third largest player in its market which is expected to see strong, demographic-driven growth.

To be fair, Syneron’s machines don’t use lasers alone, but electro-optical synergy [ELOS] technology, which is a combo of electrical and optical energy that supposedly can do wonders when put together. For those who want to learn more, see the company’s 20-F where it does a decent job of explaining the technology in understandable language.

Maybe the coolest thing about Syneron’s technology is its profitability. Gross margins are about 85% and net margins are around 44%. There aren’t too many companies out there that can put 44 cents from each dollar of sales into their pockets, after paying for all costs. Fat margins have helped ELOS win a balance sheet with no debt and $137 million in cash. The company’s market cap is $564 million.

We really don’t know whether Syneron’s products work or how they compare to the competition—although management does claim that their technology is cheaper than that of its peers. We also don’t know whether ELOS treatments will continue to grow in popularity, or be replaced by some newer and better method. We can though, look at what’s happened historically. The short version is: phenomenal growth. From ’02 to ’05, revenue was (millions): $11.5, $35.0, $57.9, $87.4. In May the company guided FY06 revenue of $113 - $120 million. During the same period net income came in at (millions): $2.0, $8.6, $27.3, $41.1. That’s growth!

We find it hard to value the company since we don’t have a strong view on its future. Looking at the trailing multiples on Yahoo Finance, the P/E ratio is 13.75, price/sales is 6.2, price/book is 3.7, and EV/EBITDA is 10.6. Keeping in mind that the company should be expected to trade at a high multiples vs. sales and book value given its profitability, on a trailing basis the current price seems reasonable. In terms of other multiples, the forward P/E ratio is 9.95 and the PEG ratio is 0.60.

Despite the margins, growth, balance sheet, and not-scary valuation, we can’t say we’re eager buyers of the company’s shares. This has to do with our own strategy of preferring the tried and true, so you might feel differently. We’re also concerned with issues raised in this Wall Street Journal article about the effectiveness of laser treatments. Here’s a sound bite: “For most patients, the results will be modest at best, many physicians say.”

ELOS 1-yr chart: