Why These 2 Beauty Stocks Are Appealing

| About: Cynosure, Inc. (CYNO)

Cosmetics did well even during the recession and as we continue to experience growth and more stability in the economy, consumers should begin to dish out more of their discretionary income for aesthetic-related products and procedures. Cynosure and Biologix Hair are two stocks that should stand to benefit from these trends.

Cynosure (NASDAQ:CYNO) develops and markets aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and pigmented lesions, remove multi-colored tattoos, rejuvenate the skin, liquefy and remove unwanted fat through laser lipolysis, reduce cellulite and treat onychomycosis. Cynosure's products include a broad range of laser and other light-based energy sources, including Alexandrite, pulse dye, Q-switched, Nd:YAG and diode lasers, as well as intense pulsed light.

Innovation is at the core of Cynosure's success and just earlier this year, CYNO launched its newest flagship product, the non-invasive PicoSure Picosecond Laser Workstation, at the American Academy of Dermatology Annual Meeting in March. PicoSure is the world's first picosecond laser indicated for the removal of tattoos and benign pigmented lesions. Data indicates that an estimated 20% of the 45 million Americans with at least one tattoo want to have it removed. With it being first on the market, PicoSure stands to gain from the first-mover advantage for Cynosure to treat a large and vastly underserved market.

Commentary from management on PicoSure has been positive. In its Q1 release, CYNO said demand for PicoSure has been positive with the revenue ramp slightly steeper than it had anticipated at this early point after the launch. The company said PicoSure is on pace to achieve its $10 million sales target.

Two catalysts are in place for the shares. Q2 will be the first full quarter of PicoSure that is sure to give a boost to the results. Also, CYNO is expecting its pending acquisition of Palomar Medical Technologies to close in June that should remove some of the overhang from the uncertainty of a large acquisition.

The shares look undervalued. The mean price target for the shares is $36.50, more than 50% higher than where the shares sit today. The growth outlook for CYNO is looking strong with revenues expected to increase 19% this year and another 16% next year. However, the caveat is that the market will need time revalue the new shares of the combined Palomar/Cynosure entity. At first glance the acquisition looks attractive as it is expected to be accretive to Cynosure in calendar 2014 with the implementation of $8 million to $10 million in projected synergies.

On a standalone basis, Cynosure has been delivering. Revenues grew 19% in the 1st quarter with gross margin rising more than one percentage point to 58.2%. That small increase in gross margin made a ton of difference on the bottom line as the company delivered a 50% increase in net income, displaying the strength of their business model.

According to The Washington Post, American hair loss sufferers spend more than $3.5 billion a year in an attempt to treat their hair loss. Biologix Hair (OTCPK:BLGX) is lining up to take some of that business and then some with its Biologix Hair Therapy System, the company's patent-pending hair loss prevention and regeneration treatment, that should serve as a big growth driver for the company in the future.

The pre-clinical trial results look very promising. Between mid-2004 and mid-2012, more than 30,000 pre-clinical-trial treatments of Biologix Revive were administered to 5,000-plus patients in South America suffering with varying degrees of alopecia, as well as people seeking preventive treatment. The participating treatment clinicians subjectively reported that virtually 100% of preventive care clients continued to retain their healthy hair and an estimated 80-85% of the males and 90-plus% of the females treated for hair regeneration experienced significant regrowth of their own natural hair. And among alopecia areata patients, virtually total hair regrowth was observed in 100% of the cases. To date, no negative side effects have been reported.

While the treatment is not yet FDA-approved, the company already has been building up its licensing team internationally. At the end of May, BLGX released clinician licensing results for the period commencing March 1 through April 30, 2013. During the two-month period, the company contracted with 80 new medical services clinics located in 32 countries of which 26 are new countries Biologix previously had not penetrated. Based on information provided by the new contracting clinics, the total number of existing patients represented by these 80 clinics is 2,038,500, of which an estimated 807,400 would be interested in either the hair loss prevention or hair loss regeneration treatment and are candidates for the Biologix Hair Therapy System.

The market for such a treatment is large as is noted above. Some big-name players are in the space, with Merck's (NYSE:MRK) Propecia generating revenue of more than $400 million on an annual basis. Johnson & Johnson (NYSE:JNJ) developed Rogaine, which reportedly had annual sales of $60 million. Allergan (NYSE:AGN), known for developing Botox, currently has bimatoprost for hair loss in the pipeline.

With Biologix Hair in the development stage for its new hair treatment, projecting earnings is tough. However, here is something to keep in mind. A simple 5% penetration of the $3.5 billion a year market would lead to sales of $175 million for the hair therapy system. If we use CYNO's 2.4 P/S multiple, Biologix Hair would sport a valuation of $420 million, well north of the current $240 million it has now.

The company has two catalysts coming up that should bring more eyeballs on the shares. First, the company is in the midst of listing on the NYSE with an application expected to be submitted by the middle of July. A listing on the NYSE should put the company on the radar screens of some of the larger investors and provide further credibility to the shares. The second point is continued progress in the company's quest towards FDA approval for which it is currently in the midst of a 12-month R&D program before FDA-related clinical trials.

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.