I wrote previously about Syneron Medical (ELOS) in the summer of 2012 when it traded at around $10/share, or a $350 million market capitalization. The equity has since underperformed the S&P 500, and I doubled my position recently because I think it offers some of the best value in the market.
Today Syneron Medical can be had for $310 million, or about $185 million after backing out $125 million of net cash on the books. The recent drop in price appears to be due to former CEO Louis Scafari stepping down, and handing the company back into the (able) hands of Founder and CEO Shimon Eckhouse.
Syneron Medical was incorporated in 2000 and is a global leader in the aesthetic device market, focusing on non-invasive aesthetic procedures. While the beauty market undergoes a paradigm shift from invasive to non-invasive surgery, Syneron Medical remains an obscure, but undervalued company.
That being said, I think Syneron Medical is squarely positioned in a market ripe for growth. Based on my understanding of Syneron's non-invasive and cost effective techniques, if they can execute on marketing and consumer awareness, this market could take off. With a growing global population of aging people and a culture becoming more aware and concerned about appearances, the total addressable market is quite large.
As such, the company outlined three critical areas of growth in a recent investor presentation.
First, non-invasive skin care on the face. Syneron Medical offers an aesthetic device containing proprietary technology that can dramatically reduce wrinkles, acne scars and pigmentation non-invasively. It is a game changer in the aesthetic market: the efficacy is higher than Botox, it's cheaper and doesn't require any injections. The device, known as eMatrix, is better, faster, cheaper and safer than the alternatives, allowing for a potentially large moat to be established.
Second, non-invasive body sculpting to reduce skin laxity, cellulite and fat. Syneron Medical offers body shaping devices based on its proprietary technology, targeted to normal and overweight people for a body sculpting solution in excess of diet and exercise, but not as extreme as invasive techniques (read: liposuction). Again, a better, faster, cheaper and safer alternative to other invasive procedures.
Third, Syneron Medical is targeting the following areas home use devices (more on this below, it's current distribution platform is to sell to doctors), teeth whitening and skin lightening solutions.
The teeth whitening market is estimated to be a $5.5 billion market.
The skin lightening market is a $10 billion market, with Asia being a large growth market. Syneron's elure cream has won multiple awards, including the 2011 and 2012 Allure Best in Beauty. And the intellectual property underlying elure is patent protected until 2023, plenty of time for Syneron Medical to build brand awareness during its period of exclusivity.
A Hidden Asset:
Syneron signed an exclusive, global development and distribution agreement with Procter & Gamble (PG) in February 2007 with respect to Syneron's line of home use devices for skin treatment and enhancement. However, it appears like there hasn't been much progress on this front since the deal was been inked, likely as a result of the global economic recession. Now with a recovering economy, it appears Syneron is now poised to capture this opportunity and realize the value of P&G's distribution channels.
P&G knows a thing or two about developing and distributing brands across the globe. The P&G Beauty Division is also a priority of P&G management, having plowed significant resources into building the business where it did over $20 billion in sales in 2012.
Syneron, however, cannot capture the value of the P&G distribution deal on its balance sheet, but in my opinion it represents significant value as it pursues the home use device market.
Syneron Medical currently trades at about 1.2 times last twelve months sales (0.8 times enterprise value to sales), with gross margins in excess of 50% and a solid growth profile.
Based on comparable device manufactures trading multiples, a price to sales multiple of 2 to 2.25 times sales is warranted in my opinion, making the equity worth between $525 and $590 million right now, with more upside potential as the business expands.
Syneron Medical is a low risk play coincident with high reward at its current valuation. It is hard to imagine the company being valued for any less than it is already, and it's easy to imagine a number of scenarios making it a billion dollar business in the not so distant future.
Those are the types of high growth value plays that reward shareholders over the long term.
If the equity price stays depressed or goes lower, I will be buying more shares absent any material change to the current business model and strategy.