Tuesday, December 29, 2015

AIM Student Equity Update by Ryan Woo: Syneron Medical Ltd. (ELOS): New Year's Resolution: "De-Inking and Shaping Up"


ELOS (Syneron Medical Ltd.): Tatto and Fat Removal!
By: Ryan Woo, Student at Marquette University

Image result for Syneron Medical logo


Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

 Summary
• ELOS engages in the research, manufacture, development, marketing, and sale of aesthetic medical products. It is a medical device company specializing in fat and tattoo removal - and it continues to post HSD - low DD organic growth, most recently 8% organic growth in 3Q2015 and 15% in the US (36% of total revenue as of 2014).

• The tattoo removal system PicoWay still has low penetration in the United States and is expected to beat initial annual guidance by $2-3 million. The non-invasive fat removal product UltraShape has had its revenue guidance for 2015 lowered, but its recurring revenue stream of FTZs has grown at mid-20% clip.

• ELOS continues to buy back shares and has no debt on its balance sheet. The company could possibly explore issuing debt to lower its cost of capital or set itself up for an acquisition if the opportunity arises.

• Despite the stock being down 40% since its addition to our international portfolio, momentum in product sales, the growth in the FTZ aftermarket for UltraShape, and commitment to a stronger marketing presence should reflect strongly in the stock price within the next six to twelve months.

Syneron Medical Ltd. (NASDAQ: ELOS) remains 'in-play'. Despite a lowering of guidance for Ultrashape, PicoWay has done enough to more than compensate for the disappointment. Momentum should gain in system sales in 1Q16 and beyond as New Year’s resolutions to “get in shape” or “remove a tattoo that was a mistake” will become more prevalent. In addition, disposable income should continue to rise as oil prices tank, which is a positive for Syneron’s overall end market.

During its last earnings call in early November, Syneron announced the hiring Jeff Nardoci as the President of the Body Shaping group in North America. This complements the appointment of William Griffing as the CEO of North America earlier in 2015. Nardoci is experienced in the medical sales field, having been the Senior Vice President and Chief Strategy and Marketing Officer for Banner Health. Higher up management is still getting accustomed to its new positions as well: Amit Meridor, Syneron’s CEO, has only been with the company since 2014, and his predecessors have had shorter terms than expected. Other company executives have only been with the company for four years or fewer. We should see improvement in the abilities and communication of management going forward.

The company may also be in a position to be taken out. Competitor Lumenis was acquired over the summer of 2015 by XIO Group, a Chinese private equity firm, for $510 million at $14 per share. This $14 represented an 18% premium to the price at which the stock was trading at previously. Syneron currently trades at a price of $7.50, but analysts believe that an acquisition could value Syneron at nearly double this stock price. This is mainly due to the synergies that could be produced from Syneron’s products and the acquiring firm’s network. A clean, debt-free balance sheet only helps the acquisition possibility.

Syneron is expected to continue its share buyback program of $20 million. Currently, it has used $9.4 million of the $20 million. With interest rates soon to rise, it will be interesting to see if Syneron takes on debt to fund an acquisition or buyback more shares, especially since the share price today is much lower than the average cost of $9.47 that the company has been paying. Nonetheless, it is important to note that management is determined to follow through by using all of the $20 million authorized in buybacks.

What has the stock done lately?
ELOS reached its high in the middle of May of 2015, which unfortunately is when we purchased the stock. Reported revenue and adjusted EPS have both slightly missed consensus estimates, resulting in recent sell-offs for the stock. A positive catalyst of increased sales guidance for new devices will be much appreciated for the share price. Management also has to do a better job of tempering analyst expectations for their products. Raising guidance for UltraShape sales from $15 to $18 million would have been much better for the stock price than lowering guidance from $20 to $18 million.

Past Year Performance: ELOS has decreased 22% in value over the past year, so the stock is on the bargain table: ELOS's market valuation is ~68% off its 52 week high. Less than half of the $20 million for share buybacks have been used, so there is still plenty of room from here to lower shares outstanding which in turn will raise EPS and the stock price.


Source: FactSet

My Takeaway

Syneron has had its fair share of issues in 2015 between the executive committee and middle management. However, the company appears to be a turnaround story with expected product sales momentum and qualified new hires. ELOS should be able to produce net income (as opposed to a net loss) within the next four quarters, which will hopefully bring the stock price back to its 52 week high. Up nearly 20% since early November, this stock is starting to move again!

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