. THE NAPEAGUE LETTER
Saturday, June 7, 1997
Editor: Bob Davis napeague.com
CANDELA CORPORATION (NASDAQ:CLZR)
Since this is the first time that The Napeague Letter has reversed its
position on a particular company, I am opening with a quotation from
Jonathan Swift, the author of Gulliver's Travels:
"A man should never be ashamed to own that he has been in the
wrong, which is but saying, in otherwords, that he is wiser today
than he was yesterday."
The medical equipment business at Candela Corporation
(NASDAQ:CLZR) is in good shape. Profits are growing rapidly and
revenues are expanding at an acceptable rate. Their product line
appears to be significantly stronger than that offered by competitors.
Award-winning new products are rapidly coming to market, which can be
expected to fuel this growth for the next several years.
However, a new venture, Candela Skin Care Centers, is threatening to
drastically reduce the Company's profits and absorb its cashflow,
which in turn may threaten the growth of the Core Business. To summarize
this situation, "the tail is threatening to wag the dog."
In its medical equipment business, Candela Corporation designs,
manufactures, markets and services lasers and cryogenic devices for a
variety of surgical applications in dermatology, urology and oncology.
After several years of marginal profitability due to heavy R&D expenses,
the medical equipment business is now experiencing sales and profit
growth as the result of several recently introduced products. Revenue
growth for the first three quarters of 1997 has been 19% and operating
income has grown over 200%. Several recent developments are expected
to help the medical equipment business maintain this increased
momentum into 1998 and 1999.
In early fiscal 1996 the Company set up a separate subsidiary, Candela
Skin Care Centers (CSCC), to set up a chain of "LaserSpas" to provide
cosmetic laser surgery, in addition to the normal services of such Spas.
It is now apparent that CSCC is absorbing a substantial portion of the
Company's cash flows, and is having a progressively larger negative
impact on its profitability. I am especially concerned about this
venture's lack of meaningful revenue growth, as well as the substantial
increase in Selling, General & Administrative (SG&A) costs incurred by
CSCC.
In addition, I strongly suspect that Candela Corporation initially did
not fully understand the financial and management resources that the
Skin Care Centers would absorb, which leads me to suspect that this
venture may be somewhat out of control. Possibly as a result, in its
financial reports, the Company is showing a growing awareness of the
level of resources needed for, and the risks associated with, this new
venture.
To reflect the newly visible problems with CSCC, I am reducing my net
income projections for fiscal 1997 (ending June 30 1997). Although I
still estimate that Candela will generate revenues of around $36
million, it appears that net income will be around $1.8 million, with
earnings per share of $0.32. Even though this is a substantial reduction
from my previous estimate, these results would be an 18% increase in
revenue and a still impressive 42% increase in earnings per share versus
the prior year. At the present time, I am not publishing any projections
for CLZR for 1998, although I have analyzed several different scenarios
for the year.
Because of the lack of publicly-available information about the
Company's plans for CSCC, at this point in its development it is very
difficult to value CLZR. If CLZR does not open additional "stand-alone"
LaserSpa sites, and if CSCC were to reach breakeven by the end of 1998,
then I feel that the long-term value of the stock is greater than its
current market price. However, I still project that the Company will
have earnings shortfalls in the fourth quarter of 1997 and the first
half of 1998, although it appears that EPS might rebound strongly in
the second half.
However, the overly-rapid expansion of CSCC's LaserSpas beyond the
current base, unless this expansion is done solely through joint
ventures designed to minimize their initial profit impact, could lead
to a series of earnings shortfalls through 1998. The resulting cashflow
problems might cause the Company to enter into financing relationships
which might be dilutive and thus not benefit shareholders.
My personal plans for investing in this stock are:
- Reduce my position in CLZR, since I anticipate that the Company
will report earnings shortfalls in the fourth quarter of 1997 and
possibly in the first two quarters of 1998.
- Continue to follow the Company in The Napeague Letter, and update
my financial projections as additional information becomes available
about new LaserSpa openings and CSCC joint ventures.
- When (and if) the Company reports weaker earnings in upcoming
quarters, and if it appears that the full impact of the CSCC
"start-up" costs will be over shortly, I will invest if the stock
can be purchased advantageously.
I have just posted an updated Analysis of CLZR to the Napeague Web
Site at napeague.com. This Analysis covers the various
points in this Summary in greater depth.
NOTICE:
This analysis is based on publicly-available information, and is in no
way warranted by me as to accuracy or completeness. I do not guarantee
to advise you as to any change in this information. I currently am a
stockholder in this Company and may from time to time purchase or sell
this Company's securities. I otherwise have no affiliation with this
Company, and I am not compensated by it in any way whatsoever. |
