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Thursday September 14, 3:15 pm Eastern Time
worldlyinvestor.com Sector of the Day
Candela Laser Improves Its Profile
Glenn S. Curtis, Columnist
This cosmetic-laser maker is starting to receive Street recognition and could light up a lot of faces.
No Wall Street coverage. Low trading volume. Inconsistent earnings.
Just a few years ago this was a perfect description of Candela Laser (Nasdaq:CLZR - news). But times have changed for this maker of cosmetic lasers. Analysts are finally starting to pay attention and the company is turning out some terrific earnings. And this may just be the beginning.
Although the company was founded back in 1970, I was one of only a handful of analysts calling this Candela up until a year or two ago. I figured that some day, dermatologists and cosmetic surgeons might use the company's lasers on a wide scale to remove hair, treat skin lesions and to get rid of varicose veins.
Candela is a fairly straightforward story. It has a solid product arsenal, respectable margins, excellent opportunity for growth, and deep pockets for a small company. This is a perfect example of a small-cap stock that's just starting to receive its due from Wall Street. And when retail and institutional players begin to jump on this stock as earnings continue to accelerate, the shares should take off like a laser-guided missile.
Proceeds From Procedures
But as with any other technology, convincing doctors to use new products, and to recommend new treatments is tough. It takes time. But again, times have changed and Candela is profiting immensely from the growing demand for non-invasive beauty-enhancement procedures.
Candela is coming off a solid fiscal fourth quarter ended July 1. It posted 20% revenue growth and earnings rose 21.2% to 40 cents per share. Strong demand for both its GentleLase system (for hair removal), and its Vbeam laser (for the treatment of leg veins, stretch marks and lesions) led to the increased revenue growth.
Going forward, management is banking on continued market penetration to drive its revenue line. Consider these numbers: Only about one third of the 17,000 dermatologists and cosmetic surgeons in the US use lasers in their practices. In addition, vascular lesion procedures are expected to more than double by 2002. In order to handle the anticipated growth, Candela is in the process of upgrading its manufacturing facilities.
By the end of October, its manufacturing capacity will have been doubled to roughly $200 million, 2.7 times fiscal 2000 revenue. All of this means that the growth story at Candela is merely in its infancy stage.
Aiming Lasers Abroad
The board of directors sure seems to think that the stock is a bargain. It authorized the repurchase of 500,000 shares back in December.
Insiders on the other hand have been fairly quiet. But the common shareholder needn't worry. Top executives continue to hold roughly 9% of the outstanding stock, and have a fair amount of options that should ensure that they will remain vigilant in their efforts to boost stockholder value.
In addition to continued market penetration and the introduction of its lasers overseas, management intends to unveil two new products over the next year. One is a skin rejuvenation system. The other is for the treatment of psoriasis. The Food and Drug Administration is expected to grant approval for both of these products within the next few months.
While no definitive pricing points have been established, it is assumed that each system will carry gross margins consistent with current margins in the 55% to 60% range. Because there has been some secrecy surrounding these systems for competitive reasons, the potential for these products hasn't yet been factored into consensus estimates.
At the end of the fiscal fourth quarter, the company reported more than $34 million in cash, or $2.85 per share, on its balance sheet. Book value is $3.89 a share. Simply, Candela has no need to tap the equity markets and is adequately capitalized to support its anticipated growth going forward.
Added Benefits
In fiscal 2000, the company realized a tax-deferred asset that effectively lowered their total tax rate to 20% from a more normalized level in the mid-30% range. Backing out that one-time benefit, Candela earned 97 cents per share in fiscal 2000. Fiscal 2001 earnings of $1.13 per share look very doable.
A conservative earnings multiple of 15 times 2001 estimates would indicate a share price of $17.
But keep in mind that when those two new laser products are released and incorporated into earning projections, I think this stock has the potential to trade in the mid-$20s. On Thursday, it was trading at about $12.50
Glenn Curtis is an analyst for worldlyinvestor.com. Prior to working at worldlyinvestor.com, he was an analyst at InsiderTrader.com, a financial Web site, and at Cantone Research, a brokerage firm in central New Jersey. Curtis is series 6, 7, 24, and 63 licensed. He does not hold a position in the companies mentioned. Positions can change at any time. |
