Tuesday evening, BriteSmile (BSML) reported financial results that lend support to our thesis that the company is turning the corner on profitability and is positioned to potentially report solid earnings growth in 2007.
While the top-line came in a bit below our expectations, the company reported breakeven EBITDA, excluding non-recurring legal charges. Most importantly, a brief analysis of the balance sheet suggests that BSML did in fact generate nearly 300K in cash during the quarter. Though the legal saga continue to cast a cloud over BSML's financial statements, we believe that these recent financial results suggest that BSML is significantly undervalued at the current price.
With an enterprise value of about $15 million, the stock trades at a nearly 50% discount to our estimated base sales of approximately $28 million. Moreover, it is important to note that the enterprise value excludes significant additional potential cash that may be freed up on the balance sheet once legacy legal situations are resolved.
In addition, our enterprise value does not give any value to the roughly $150 million+ tax loss carryforwards of BSML. Our view is that the tax loss carryforwards alone are probably worth the current price of the stock, which means that investors are getting the actual business of BriteSmile for free at current prices.
Importantly, we continue to believe that BriteSmile's current business has excellent growth prospects given the company's extremely strong brand recognition in the rapidly growing $1 billion+ tooth whitening market. Of course, a significant component of our enthusiasm for the shares rests on our assumption that management is intelligent enough to capitalize on the whitening market via low-cost, and essentially very obvious growth opportunities.
As we have mentioned in the past, BriteSmile of course has interesting growth options in the retail spa business, but the company has much bigger potential in the high-end product market for dental whitening and other oral care related products. Though management has seen proof of consumer demand for these products via several successful QVC runs, they have yet to focus significant resources in this area due to an almost textbook case of cognitive dissonance.
Specifically, since the business started as a procedure business and management has spent significant time and money on the procedure business, they simply can't seem to grasp that the market opportunity on the product side is much larger and more attractive than the procedure/spa business.
As anyone familiar with the product business will tell you, retailers and consumers want brand names and BriteSmile sure has one because of the already significant investment the company has made on the procedure side. So it seems obvious to us that if management would simply focus attention on building a highly-profitable product business around the company's successful BriteSmile-to-Go whitening pen and other existing products, revenues and profitability at BSML could soar. Simply revamping the company's website design to provide greater visibility for existing products would greatly increase BSML's top-line.
Nutrisystem (NASDAQ:NTRI) should provide a lesson to BSML management. When NTRI ceased to focus on its physical centers, and instead leveraged the company's brand name to sell products online at both QVC and its own corporate website, sales soared and the stock increased more than 50-fold. The same could happen if BSML if management only took notice of the obvious similarities and state of the whitening market.
What will it take for BSML's management to see the light? We're not sure, but since greed eventually prevails, we're optimistic that the large shareholders of BSML who to date have failed miserably to capitalize on the company's first-mover status in the tooth whitening industry, may want to redeem their business failure, and finally make some serious money, by continuing to engineer a successful makeover of the company. This is ultimately a very easy to company to grow significantly given the strong consumer demand for brand products and services in the beauty category.
Disclosure: We own shares in BSML. We first alerted subscribers to BriteSmile (BSML) at an average share price of $1.75.