After submitting the Seeking Alpha article Syneron Medical: Falling Revenue Should Only Be Temporary, I had an interesting telephone conversation with Judith Kleinman, VP Investors Relations at Syneron (NASDAQ:ELOS). As that Syneron gives top line guidance and just recently started giving bottom line guidance, Kleinman was impressed with our (CrossProfit) analysis pegging 2006 EPS at $1.89. “Definitely in the ball park” was the response. The rest of the conversation was about the current stock price, Q3 2005 sales and earnings highs, Q4 2005 analysts’ speculation, Europe Asia & China and insider selling.
With YOY EPS growth exceeding 25% a forward PE of 14 is cheap. No let’s correct that, it’s an outright give away. In my previous article I mentioned that ELOS is trading at 14 x trailing PE, not forward PE. Taking the worst case ball park scenario, 2006 EPS coming in at 1.85 would indicate a $25.90 valuation. The stock is currently at $20. Compounding this undervalue phenomena is that the competition is priced at 20 x forward EPS and above.
Mindboggling is that some competitors are showing a lower growth rate for both top (revenue) and bottom [EPS]! The industry as a whole is experiencing tremendous growth and the consensus outlook is that this trend should continue regardless of U.S. economic activity.
Though Syneron doesn’t officially comment on its stock price, I got the distinct feeling that the stock is terribly undervalued. This was our own conclusion based on our proprietary fundamental analysis prior to this call.
A self correction is in the cards once the Q2 2006 figures are published in August. Kleinman was careful not to disclose figures.
According to Kleinman, Q3 2005 sales and earnings spikes were misread by the market. At the end of Q2 2005 Syneron received FDA approval for its VelaSmooth medical device, designed to temporarily reduce the appearance of cellulite. Q3 2005 spiked due to the backlog of orders awaiting the FDA action. The market missed out on the significance of the timing of this (sixth) addition to the product line. Analysts started upgrading their sales and EPS estimates contrary to the company’s official guidance.
One might temporarily excuse the analyst blight as Q3 is usually the weakest quarter while Syneron reported a performance light years ahead of its best quarter.
I surmise that when Q4 figures were in line with guidance, instead of punishing themselves, analysts deserted the stock. Well, not exactly. The drop to the 30/33 range was justified because the 40 range was largely due to the frenzy created by analysts. Without mentioning names, some analysts hyping the stock didn’t and do not officially cover the stock! (There are 9 certified analysts covering Syneron.) The drop from 30 to 20 could be these same pundits trying to recoup losses generated by their own sins by shorting the stock. Who knows, but if that’s the case they deserve to get burned twice. I should have titled this article ‘Sins and Virtues of Laser Blinded Self Guidance’.
Upon discussing China, Kleinman was not in her office and could not confirm any trends regarding Asia or China in particular. Reading in between the lines, I conclude that our source regarding China (“We expect to see positive results from the Chinese market already in Q3”) may be more speculation than reality. Kleinman’s tone on Europe was very upbeat. I have made a note of this and I am looking forward to dissecting Q2 results.
Kleinman also mentioned that R&D is projected at 7% for 2006 – interesting! We think it might come in a tad above. Still the numbers are good.
We both agreed that Syneron has to do a better PR job on the insider selling issue. As a general rule young companies tend to compensate their senior executives with a combination of (lower) salary and stock. The insider sales have been primarily compensation oriented.
Syneron being a three year old filly is no different. Updated insider selling statistics is a complicated topic that requires further research and a separate article comparing Candela, Cutera, Palomar and Syneron.
Disclosure: Author is long shares of ELOS as of 7/13/06.