Cynosure: A Value Play on Vanity (CYNO, rated BUY)
Despite releasing weak preliminary operating results for 4Q08 last week, Cynosure (CYNO) represents an attractive long-term value play on vanity. The maker of aesthetic laser systems for the cosmetic medicine market has $95M in cash, equivalents, and investments as of year-end – representing an increase of $3M from 3Q08 despite posting disappointing results for the latest quarter. CYNO currently trades at a market cap of just $92M with less than $1M in debt on the balance sheet, a low 12.7M shares of common stock outstanding, and a small float of 3.8M shares. The Company blamed weakening credit conditions and the global economic slowdown for the 4Q08 sales shortfall, expected to be $25-$26M versus $36.6M in the year-ago period. CYNO expects to report a GAAP net loss of $2.2-$2.7M ($0.17-$0.21 per share) for 4Q08, compared to net income of $5.3M ($0.41 per share) in the year-ago period. Further evidence of the weak global economy and deteriorating credit conditions is evidenced by an expected bad debt charge of $2.5M for the quarter, representing uncollectible accounts from practitioners who are unable to make their payments. The Company will release its fully audited results before the market open on February 10, and has reduced its workforce by 17% as part of a cost-cutting strategy which is expected to reduce expenses by $8-$10M during 2009. CYNO will continue to invest in product development and engineering to ensure future growth from innovative products such as the Smartlipo workstations and SmartSense delivery system, which are used together to permanently remove fat cells via laser energy – resulting in a less invasive and quicker healing procedure than conventional liposuction. Despite a pair of downgrades last week from buy to hold, CYNO represents a value play in a culture that is obsessed with looks, in addition to favorable demographic trends that include the aging of Baby Boomers. The Company's products cover a full range of procedures, including the removal of unwanted hair (Apogee Elite), skin lesions (Cynergy system), cellulite (TriActive LaserDermology system), and wrinkles (the anti-aging Affirm system). CYNO has global reach (over 60 countries) through its direct sales force, subsidiaries, and international distributors. The Company holds 37 U.S. patents and markets more than a dozen different laser-based systems for the cosmetic medicine market. As illustrated on the accompanying 5-year stock price chart, CYNO has declined the least of its peer group in the laser aesthetics market, including Palomar Medical (PMTI), Cutera (CUTR), and Syneron Medical (ELOS). http://www.etfinnovators.com/2009/01/cynosure-value-play-on-v... However, CYNO is still trading near all-time lows and has lost over one-half of its market value since it began trading about three years ago at about 20 bucks per share. With CYNO trading at 0.69X book value, 0.64X trailing revenue, and a trailing enterprise value to EBITDA ratio of just 0.71X; the stock is also a takeover target – with Johnson & Johnson (JNJ) and Abbott Labs (ABT) being two likely buyers. JNJ recently purchased breast implant maker Mentor to expand into cosmetic medicine; while ABT purchased Advanced Medical Optics to expand its presence in the eye care business, including a leading position in LASIK vision correction procedures. Another possible buyer would be the largest pure-play cosmetic medicine company and maker of Botox, Allergan (AGN). However, CYNO is positioning itself for a return to profitability on a stand-alone basis, while the $95M in cash and investments provides investors with downside protection and an excellent long-term risk/reward investment opportunity given the Company's market cap of just $92M.