I was recently looking for reasonably priced growth stocks. The criteria I used were a high 5-year revenue growth and a high return on invested capital. To narrow down the list, I favored companies with low debt and reasonable valuation (in terms of P/E ratio and Price/Book value). Furthermore, I weeded out companies with very low market capitalizations and companies currently facing serious financial or operational problems, including all companies associated with the real estate market.
The ultimate survivor of this process was Syneron Medical Ltd. (NASDAQ:ELOS), an Israeli company which makes non-invasive aesthetic medical products using proprietary electro-optical technology. Its products are used for a wide range of aesthetic applications, such as hair removal, wrinkle reduction, rejuvenation of the skin’s appearance and treatment of cellulite.
Syneron was founded at the end of 2000 and recorded its first meaningful year of sales in 2002 with revenues of USD 11.5 million. Sales grew over tenfold in the next four years to USD 117 million in 2006 and will grow another 25% in 2007 if management’s estimate of USD 146 million is realized. It is impressive that Syneron has been able to capture over a 20% market share globally in such a short time. Regardless of whether it manages to increase its market share, the company can be expected to show a healthy growth rate in coming years as it works in a growth market. The aging population of the world’s most affluent countries, with its desire to hang on to its youth, should keep this market growing at a rapid rate. Additionally, Syneron has entered an agreement with Procter & Gamble to develop and supply home-use devices which P&G will market and distribute.
Syneron has a strong balance sheet with virtually no debt and has funded its growth with operating cash flow. Apart from high margins, Syneron’s cash generation has been boosted by the company’s favorable tax status in Israel - Syneron has only been paying between 2% and 4% taxes on its net income. The company will keep this tax status until 2014, after which the company will likely be paying higher taxes.
It seems that Syneron has achieved its impressive growth partially due to aggressive sales methods. Trade receivables have risen from 14.9% of sales in 2004 to 32.9% of sales in 2006. Operating margins also fell in 2006 and the first half of 2007, mostly due to a large increase in selling and marketing expenses. This is not strange as there is usually a price to pay for rapid growth and Syneron seems to be managing its high-growth phase well with its strong balance sheet and significant cash generation. Given its prospects, Syneron is looking attractive at a P/E of 16.2.
Disclosure: I do not have a position in ELOS personally or on a client’s behalf at the time of writing.