After launching an IPO five years ago in the high single digits, Synergetics (SURG) has been stuck in the mud. Revenues have been stagnant, averaging around $50 million a year for the past three years, while its stock has done nothing but move lower since becoming public ... Until now, that is.
A few weeks ago the company secured a game-changing licensing, settlement and supply agreement with Alcon (ACL), a $7.5 billion company considered the Microsoft (MSFT) of the ophthalmology sector. The licensing and settlement deal with Alcon puts the company on the map and validates their IP and next-generation technology. In addition, the deal dramatically improves the company’s balance sheet, from one beholden to $11 million in net-debt to a company now with $5-6 million in net cash on its balance sheet. The dramatically improved balance sheet is a big deal for SURG when you consider its market cap is only $70 million.
The good news does not stop there. For those who like to spend their free time digging through remote S.E.C. filings late at night (like we do!), you would have discovered what we feel is the most revealing aspect to this deal: Alcon is going to make Synergetics a third-party manufacturer for those products that are being cross-licensed to Alcon. As part of this arrangement, Alcon has agreed to give Synergetics $2 million to upgrade its manufacturing capability to support the expected ramp of these products.
Let’s apply some logic here. If the supply component of the Alcon deal was not going to be a significant generator of future revenues for SURG, why would Alcon pay the company $2 million to ramp up its manufacturing capacity? In our view, the Alcon deal could ultimately become a transformative source of revenue growth for SURG, growth that should immediately flow to the bottom-line. On its brief conference call announcing the Alcon deal, SURG's CEO, Dave Hable, stated as much, saying:
The supply agreement with Alcon would have a material impact on its existing manufacturing base.
With recent cost cuts already in place and improved efficiencies with its lean manuacturing process achieved, SURG may soon be generating $1-$2 million in cash per quarter. Now, when you consider this side of the story and add in the potential for $.08-$.10 in quarterly earnings starting in a quarter or two, SURG could have considerable upside from current prices in a good market.
Turning to the technical side of the ledger, the stock’s strength is truly eye-catching. Upon "surging higher" after the deal with Alcon was announced, SURG has held onto all of its most recent gains. As far as we can see, it is one of the only stocks to have exhibited such relative strength through the "Flash Crash" and the recent test of the lows. Any move through $3 should usher in a new up-leg for the stock.
Earnings are due in a few weeks, and we expect a very upbeat conference call, further details on the Alcon deal, and a positive update on the company's other side of its business, the neurology side. Considering the undiscovered nature of the stock, its relative strength and a near-term catalyst to propel shares, we remain buyers of SURG at current prices and on pullbacks to $2.7-$2.8.
Disclosure: Author long SURG