These Medical Device Companies' Time May Have Come...Again

Includes: ELOS, LUME, MDT
by: Shlomo Greenberg

Two medical device stars of 2003-05, Given Imaging Ltd. (GIVN) and Syneron Medical Ltd. (NASDAQ:ELOS), have not been able to repeat their performance. As for Lumenis Ltd. (OTC:LUME), one can only have pity. I think that this situation is temporary and that investors ought to closely monitor these companies because some of them are simply suffering from a lack of attention, while others suffer from a lack of understanding by investors. You decide which company falls into which category.

Jeff Fischer and Tom Jacobs founded Complete Growth Investor in 2004. Fischer was previously the research director at Motley Fool, responsible for highly popular “The Hidden Gem” column, which gave investors many successful hot tips. He is also considered a top expert on options and knows the investment world well. He is now casting his searchlight on Syneron, which he says is the most interesting story at the moment, on the basis of his models for examining shares.

Fischer writes that despite current problems (meaning the intense competition in the industry), Syneron is growing, with a strong cash flow and attractive p/e ratios, operating in a market that will double in size within five years. He says Syneron’s current share price gives the potential for a strong upside, and has resistance against a fall in price because of its values. He says Syneron is the kind of good risk/opportunity that he enjoys as an investor.

So far, so good. However, I reiterate that the problem has more to do with analysts and experts than investors. If you compare Syneron with its competitors Candela Corp. (CLZR), Cutera Inc. (NASDAQ:CUTR), Cynosure Inc. (NASDAQ:CYNO) and Palomar Medical Technologies Inc. (NASDAQ:PMTI), you’ll discover that Syneron outscores them on every business and economic variable. It definitely outscores its neighbor Lumenis, which I will talk about later. All laser treatment shares, except for Palomar Medical for reason that are not clear, have been sliding in the past nine months. The reasons vary, but they are all related to the changeable mood on Wall Street, since all these companies are quite successful and growing on Main Street.

Why should Syneron’s share plummet? The reason is “The” correspondent Jim Cramer. There can be no doubt that Syneron’s fall from its level of December 2005 is connected to Cramer’s popularity. He raised it up and he cast it down. Investors tend to disregard the power of media giants and star commentators. In addition to a leading website, Cramer has radio and television programs, where Syneron has long been a star. The company was initially given a very warm recommendation, but was then cast aside. Syneron began its slide when Cramer cast the company to the dogs, and recommended Cynosure instead, a company that only recently held its IPO. The reason is the cold shoulder given by the same day traders who had boosted the share to $47, while value investors waited on the sidelines. In addition, around mid-year talk began about rising competition in the industry.

Investors told themselves, “If this is the case, let’s wait until we see which companies are the winners, and then we’ll buy its stock.” As a result, Syneron found itself at the bottom, despite all its virtues.

But if the analysts’ consensus is right, and Syneron will post earnings per share of $2.02 in 2007, or even achieves the minimum forecast of $1.93 earnings per share, then it’s a bargain. We’ll see. By the way, the only thing that might hurt the share is the fear, mostly held by analysts, that if the company changes hands as has been reported, competition will intensify many times.

The story at Given Imaging is different. The share’s slide began in late 2004, when it was $47, to a current price of $19, a loss of 60%. In contrast to Syneron, Given Imaging’s share fell because of falling sales and profits, so the drop in justified. The question is whether the previous climb was justified. Definitely not; it was driven by the intense enthusiasm generated by the company’s results and hopes that it would repeat the success of the endoscopic capsule for the small intestine with its capsule for the large intestine, rather than the actual numbers.

When investors realized that the new capsule was not yet on the market and that many more permits were needed to enter new markets, the share reached a temporary peak, and began to slip. I’ve heard in recent months that progress is being made on both the capsule and the permits.

Given Imaging’s management has been replaced and Elron Electronic Industries Ltd. (OTCPK:ELRN) strongly believes in it. 2006 was a lost year as far as business is concerned; it was a year of adjustments. Analysts claim that the company will see a leap in sales and profits in 2007. Nevertheless, they still give the share a “Hold” recommendation. It’s very worthwhile to begin monitoring the company’s activity, because things develop quickly in this industry.

As for Lumenis, I read that a group of investors led by Harel Beit-On, Aharon and Shlomo Dovrat, Avi Zeevi and Ofer Hi Tech Ltd. have signed an agreement to buy 75% of the company. The important point in the announcement was that the company intends to file with the US Securities and Exchange Commission [SEC] a request to re-register its shares on Nasdaq. This is refreshing for the thousands of small investors who have been forced to wait for salvation because of the decisions of a board disconnected from reality, and who have not bothered to inform them when this dubious salvation will happen.

Unquestionably, Lumenis under new ownership and without financial pressures can return to its glory days. The buyers are a group with very serious capabilities and a proven track record, and the door may have been opened for Syneron and Lumenis to collaborate in future. This is conditional on Lumenis’ current officers, including its chairman, CEO and board of directors, being shown the door.

Published originally by Globes [online], Israel business news - © Copyright of Globes Publisher Itonut (1983) Ltd. 2006. Republished on Seeking Alpha with full permission.

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