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Summary

  • Diversified clinical solution provider is showing growth and profitable.
  • Yet 2013 earnings are inflated through litigation settlements.
  • Valuation remains expensive, unless the promising pipeline makes a big impact later this year.

Lumenis (NASDAQ:LMNS) focuses on the development of minimally invasive clinical solutions. The company targets solutions for necessary and elective medical procedures, targeted an aging population.

The company has seen a highly disappointing public offering at the end of February followed by a strong underperformance in its shares ever since. Despite the discount I don't believe that current levels are compelling, unless the new product pipeline will dramatically improve earnings going forward.

The Public Offering

Lumenis is building a brand and leadership in the surgical, ophthalmic and aesthetic markets. One of the key solutions is the VersaPulse PowerSuite platform for urological applications. Other treatments include the M22 solution for skin conditions, among others.

In each of the three major segments which are targeted by the company, Lumenis targets one or two product launches before the end of this year, marking a very strong product pipeline.

Lumenis sold 6.25 million shares for $12 apiece, thereby raising $75 million in gross proceeds. Demand for the offering has been weak as the company and the underwriting syndicate aimed to sell shares in a $15-$17 preliminary offering range. Some 10% of the shares outstanding were offered in the public offering.

Lumenis has seen a very disappointing debut. Despite the lowered offering price, shares failed to show a decent first day gain. As a matter of fact shares have continued to slide to lows of $8, currently trading around $9.00 per share. This suggests that the company is valued around $550 million at the moment.

The major banks that brought the company public were Goldman Sachs, Credit Suisse, Jefferies and Wells Fargo Securities.

Valuation

Products of Lumenis, which target the surgical, ophthalmic and aesthetics markets, are competing in a combined market opportunity of an estimated $3.5 billion. A new management team has led the business since 2012, focusing on execution, growth and profitability.

In 2013 Lumenis reported revenues of $265.4 million which is up by 6.7% on the year before. A strong cost focus and $6.7 million in settlement proceeds boosted earnings from $7.0 million in 2012 to $17.4 million in the past year.

The surgical and aesthetic business are the largest and most profitable businesses of Lumenis while the ophthalmic business is less profitable and smaller in size.

Ahead of the offering, Lumenis operated with nearly $43 million in cash and equivalents while having roughly $70 million in debt outstanding. Adding $75 million in gross proceeds will result in a net cash position of roughly $40 million after the public offering.

As such operating assets of the business are valued around $510 million, nearly 2 times annual revenues. Shares are valued around 29 times annual earnings.

Investment Thesis

As noted above, the offering of Lumenis has been very disappointing. Shares were priced a quarter below the midpoint of the preliminary offering range, and from there it was only downhill. At current levels around $9, shares have lost nearly 44% of their implied value based on the midpoint of the offering range.

The sell-off is slightly surprising as Lumenis states that it has a full pipeline. This is combined with solid topline revenue as well as earnings growth. Fourth quarter revenue growth continued, with revenues increasing by 7.3% to $71.1 million. Earnings fell slightly from $5.3 million to $4.7 million.

Despite the violent sell-off after the offering took place and during the pricing process, I don't believe that current levels are a nice opportunity. Stiff competition, discretionary spending on a major portion of its revenues, and the politically sensitive location in Israel are relatively minor issues. The biggest issue is the quality of earnings, with 2013 earnings being aided through a $7 million settlement. This implies that normal earnings were only $10 million that year, inflating the price-earnings ratio more towards 50 times earnings.

While the pipeline appears strong, there is little quantification of the impact of the expected product launches later this year. I will await product releases, an issued outlook for the year, or the next quarterly earnings release before reconsidering my stance.

Source: Lumenis - Despite A Violent Sell-Off, This Recent IPO Is No Obvious Opportunity