Retail Investor's Blog

Syneron Medical (ELOS) – Maintaining Bullish View

noreply@blogger.com (Anonymous) — Mon, 07 Aug 2006 12:53:00 +0000

My last update on ELOS is almost a quarter old and with ELOS announcing its 2Q06 results today, it is time to revisit the investment thesis on this once again. A lot has transpired since the last update on May 20^th.

In brief, we had the following upcoming milestones for ELOS as of 5/20/06, as summarized by the top analyst in this field, Suraj Kalia:
1) Potential launch of home use skin rejuvenation product by year end ‘06.
2) Potential strategic partnership on the dermal filler / home use front – 2H-06.
3) Newer indications for the VelaSmooth 2H-06.
4) Dental laser product launch late 2H-06.
5) Non-Invasive Fat removal device – Potential launch late ’06 or 1H ‘07

To quickly recap the events of significance for ELOS from 5/20 to 8/6 before discussing the Q2 earnings today:

- On 6/5/06, Cutera settled patent infringement lawsuit with Polamor admitting to infringement and the CUTR stock soared up 40% as investors are happy that the lawsuit is behind them. Syneron opened up 6% in sympathy though it has absolutely nothing to do with the lawsuit, was never vulnerable to a lawsuit and doesn’t really gain anything from this settlement.

- On another story, also on 6/5/06, American Medical Systems announced that they will be buy Laserscope, LSCP for $31 a share a 45% premium to its closing price and LSCP shot up 45% in morning trading as a result. Though one should question the deep discount at which ELOS is trading compared to the bid LSCP received, ELOS did not react to the offer for more than a few hours of trading.

- On 6/5/06, I also lost my position as the only financial blogger on ELOS (there are plenty of medical blogs on ELOS) with “Average Joe Investor” highlighted ELOS as his stock of the week. Welcome aboard Average Joe! In his summary: “Syneron could be a good bet for someone with some risk tolerance. While there certainly is potential downside in the stock price if they miss analysts estimates in Q2, a lot of the downside has already been taken out of the stock through the relentless beating it’s taken the last two quarters. On the other hand, the potential upside is pretty nice.”

- On 6/14/06, CIBC reiterated their Outperform on ELOS, saying channel checks suggest that 2Q06 sales are on track, Vela will likely be up sequentially from 1Q06, and the new eLine Series seems to be doing well. Firm also noted that the stock currently trades at just 8x 2007 EPS (ex-options), while the peer group trades at an avg P/E of 21x. Given the product breadth and pipeline of new products, the firm believes that ELOS's current level represents an attractive valuation to start or add to a position. Hopefully their "channel checks" are as good as they were in Q405 when they killed the stock in the first place!

- On 6/15/06, Syneron presented at the Needham conference today - Dr. Eckhouse made an excellent presentation with numbers to support his vision for the company.
-138 mil in cash
-2006 - 2007 will be the turn to the future products of $250M company
-no taxes for another 8 years
-45-50% net margins going to our pile of cash or over 10 million per quarter
-growth average 45% a year
-sales 60% north America 40% the rest of the world
-no warnings today, stock stable at this point
-new products for dentistry + cosmetology gadgets
-home use wrinkle devices and improved ELOS line of products for doctors to make more money from aging population

- On 6/23/06, my son turned 1 and boy, is he cute!!! Well, back to ELOS, GroovyStocks joined the elite group of ELOS financial bloggers, though not as positive, with his note on ELOS – A Wildly Profitable Company and he has a couple of interesting comments on his post in his blog site

- On 6/26/06, Saul Sterman, of CrossProfit, put out his note that the revenue dip for Syneron should only be temporary

- On 7/12, Israel and Lebanon started engaging in a war that is feared by some to even be the start of WW III while others are optimistic will end soon. All Isreali stocks and their ADRs started taking a blood bath as the war induced uncertainty of the company’s future and potential damage to manufacturing and operations.

- On 7/13, Saul updated his note on 7/13/06 and we had a discussion on the impact the war may have on ELOS – he had initiated a position in the company at this time. Saul’s initial response to my question on the impact of the war – “The tense situation in Israel has no effect on ELOS. Manufacturing is done globally. Supply lines are secure. In the odd chance of an all out ground offensive into Lebanon, the IDF would call up only a small portion of the reserves. A few younger scientists in R&D might miss a month or two at work but that would be the extent of a worst case scenario. General Management is accustomed to doubling up whenever an employee goes off to do their annual reserve duty. A war situation is no different.”

I had to object to that, since I knew that all 3 manufacturing plants are indeed in Israel and Syneron’s manufacturing is not done globally, to which Saul was quick to provide a detailed response and more clarification:

“At CrossProfit when compiling data on nearly 1000 U.S. listed companies we analyze their BCP – Business Continuity Program. Truth be told, with most Israeli companies we don’t bother. Willy-nilly most Israeli companies had a BCP in place long before 9/11. Syneron is no exception. Syneron subcontracts all manufacturing. This is one of its strengths on an ongoing basis and provides the basic structure of its BCP. The way Syneron has structured its BCP is typical Israeli style i.e. a three prong approach.

1) Primary protocol: Manufacturing is outsourced to three Israeli companies.

2) Secondary protocol: The three sites are located in three different geographical locations within Israel. Any two out of the three have the ability to manufacture the complete product line. Syneron will confirm this.

3) Backup protocol: Syneron maintains all production files at a location other than the three Primary sites. At the drop of a hat production can be transferred to several other predetermined locations/subcontractors (in or) out of Israel. Syneron will confirm the existence of the production files but will not disclose details of its backup protocol.

In the case of a general call up of all reserves (unlikely) Syneron could activate its Secondary protocol and combine manufacturing to two sites. There are other options as well. In the case of: nuclear (Iran?)/chemical (Syria)/biological (?) attack (not on the table now) Syneron could turnkey its Backup protocol. Sorry for the doomsday prognosis but you did want to know if there was any added risk due to the Middle East situation. The answer is none. Very few Fortune 500 companies have this type of a global production capability. The Primary/ Secondary/Backup structure is the best known/cost effective BCP method available. The backup protocol is confidential. Hence, we do not know where the production lines would popup should the occasion arise. I should have said ‘can be done globally’ and not ‘done globally’. Thank you for noticing.”

Encouraging interaction but haven’t had the time to check into the credibility of Saul’s comment on Syneron’s “BCP” but haven’t found a reason not to trust as of today.

- On 7/18/06, Andrew T. Gillies, an Associate Editor at Forbes, wrote up an article on stocks with Israel’s War Discount highlighting ITRN as his top pick but bringing attention to ELOS also.

On to Q206 earnings:

Syneron released 2Q earnings at 6:30 am on August 7^th – reporting sales slightly ahead of consensus at $27.5M in sales but earnings of 32 cents versus the 39 cents estimate.

- Revenues: Q206 revenues grew 37% Q205 from $20.1 million to an all time high of $27.5 million. The consensus estimate from analysts was for $27.3M - so in line.
- Expenses: Incurred additional expenses associated with the introduction of new eFamily products and increased sales force.
- EPS: On a GAAP basis, $0.32 (which includes stock-based compensation expense of $2.4 million, or $0.09 per diluted share) versus consensus of $0.39 - so need to wait and see what the reaction will be for a "7 cent miss" - the question will be answered based on whether value is attached to the growth of the company than the bottom-line. EPS grew from $0.25 in Q205.
- Cash balance: Increased to $148.5 M or $5.53 per share with no debt. Considering acquisitions and buy backs with the cash in hand and the discounted multiple that the stock is trading at now.
- Gross Margins: Ended at 84%, their internal target - 85%. The small slip is being attributed to revenues from Europe, Asia and Latin America rising to 50% of total revenues, compared with a historical level of 40% to 45% and they anticipate margins to be back up as the return to historic geo mix.
- DSO: Trade receivables were $29.7 million on 6/30, representing a decrease of DSO by eight days to 98 days on an end of quarter basis and 95 days on an average balance basis. Expects DSO to remain in the mid-90s going forward.
- Geo performance: Sales in Europe and Asia grew Q/Q and Y/Y. In North America, sales grew 17% Y/Y and flat Q/Q in spite of mgmt transitions.
- Guidance: Given the benefits from marketing and sales initiatives worldwide, as well as cost management initiatives, ELOS continues to expect to meet previously announced guidance of $114-120M for 2006. The new products are still on target for a Q107 release.

Initial reaction from the retail investors has been positive with Syneron trading up as much as 10% pre-market – though on insignificant volume. I will be watching for the analysts’ reactions to Syneron’s Q2 earnings. In my books, Syneron is clearly a company that is focusing on growth and striving to achieve top line revenue guidance without worrying about bottom line profits. Kudos and maintaining my bullish view on this company.

Disclosure: I continue to maintain my “very” long position in ELOS

Last Updated: Aug 7^th 2006

Syneron Medical (ELOS) Update – Now a Growth and Value Investment

noreply@blogger.com (Anonymous) — Sat, 20 May 2006 12:04:00 +0000

Folks who have read my blog earlier know that I am very bullish of Syneron Medical (ELOS) and have my money where my mouth is – maybe even a lot more than how much should be in one stock. I have received a number of questions on my thoughts on ELOS now that it has shed more than 50% of its value and if I am still holding on to the shares and I have seen my previous post on ELOS being actively discussed in StockArena.com, the Yahoo! Finance message boards, SeekingAlpha and other sites. Before I revisit ELOS and why I am still bullish on the stock and probably even more than before, let me say "YES", I still hold all my Syneron Medical shares and have either taken assignments on the naked put positions or rolled them forward to a Jan ’07 expiry. This is an investment and the only way to lose money on ELOS now would be to sell in panic or sell hoping to make the loss up through another equity. Its been 3 months since the last discussion on ELOS and there have been a few significant events in this time frame:

First, on March 7^th, CIBC who started the downturn in ELOS by cutting their rating on ELOS from Sector Outperform to Sector Perform on Dec 30th, came out with the upgrade and reversed their stance from a Sector Perform to a Sector Outperform and slapped a $40 price target on March 7th on really no new news.

The essence of that analyst report:
As of 3/06, we are raising our opinion on ELOS to Sector Outperform from Sector Perform due to feedback from the AAD that the market is remaining surprisingly strong. Syneron is also launching a new e-Line of laser and light source products for skin tightening,
non-ablative photorejuvenation and hair removal.

- This new family of products consists of the eLight, eLaser and eMax and is being launched here at the American Academy of Dermatology (AAD) in San Francisco. The new eLine is expected to give ELOS much better brand recognition and identity.

- In skin tightening, the eLight product, which combines intense pulse light with RF, is expected to allow Syneron to compete more effectively with the Titan product from Cutera (CUTR-not rated).

- We applied a 20X 2006 P/E multiple to our EPS est. of $2.00 to derive our $40 price target ELOS shares have been punished since the 4Q05 disappointment, but we believe the stock will begin to trade back toward the peer group avg. with these new products and market opportunities.

It is encouraging that CIBC whose “channel checks” suggested issues with sales came back within 3 months and have been thumping their table on ELOS.

On March 31^st, they came out with a follow-up report titled: Syneron Medical Ltd.: Update on ELOS' Deferred Revs; We Would Buy - Stock's Too Cheap In Our View but didn’t just stop there, and on April 27^th in their report titled: Syneron Medical Ltd.: Management Change to Be Smooth Transition; Sales Force Intact expressed a lack of concern on the management changes announced and reiterated their Sector Outperform rating on ELOS and went ahead to write:

We view today's weakness as a buying opportunity, as the stock now trades at 14X our 2006 EPS
estimate versus the peer group average multiple of 28X.

- The stock is off today after the company announced that its President of North America, Dominic Serafino, would be taking a leave of absence for personal reasons. Serafino has made a great contribution to Syneron over the past several years, but we believe he wanted to take a break.

- Based on our channel checks, we believe ELOS will hit consensus revenue estimates of $24M for the quarter, we expect guidance to remain the same for the year at $113-$120M, and we think the company should have a good second quarter given the recent launch of the eLine of products. As noted in the company s press release, Mr. Serafino's intention is to return to Syneron and work in the strategic planning and business development area. The recent changes in the global sales and marketing initiatives in the company may have also contributed to his decision.

We understand that there has been no unusual turnover at the company in sales. We spoke with the company, and it currently has 56 sales reps in place, up from 40 at the end of 4Q05. This is actually ahead of the company's guidance to have 55 reps in place at the end of 1Q06.

We believe that Syneron is attractively priced here, trading at half its peer group multiple, and we like the company's product pipeline.

The stock though is clearly in a rut and has not reacted to these positive reports as it did it to CIBC’s initial negative report. And I do not know when the turn around will begin and so those looking for a quick short term move may not be interested in ELOS but those who are looking for a solid investment should consider ELOS not only a great Value play with the stock trading at more than a 50% discount to its peer group, with results that are at the upper end of this peer group but also the growth play that it was when the previous article on ELOS was published on this blog – nothing has really changed dramatically in their growth story though clearly growth has slowed to 28% and that has some investors concerned.

I would like to also point to readers to another article - Growth Vs. Value – Real Distinction or Not? An excellent article that discusses the fact that some stocks like ELOS are value stocks trading a deep discount to their real value, but are also growth stocks at the same time. The author considered ELOS undervalued by about 30-40% to what he calculates as the true value of his stock and this was when ELOS was trading at $26. In other words ELOS is currently trading at about a 50% discount to his fair value.

So if this stock can double, then why is it stuck in that rut and achieving new 52-week lows every week? A couple of reasons:

- Stocks move on more than just fundamentals. In ELOS's case the discount in stock price can be attributed to management incompetence. As we know, they missed Q4 revenue estimated by $3M and that did not show up in Q1 as they missed again. But they have not taken down their guidance and are not following a UPOD (under promise over deliver) strategy. In fact management came out and raised guidance and in Q1 delivered results which were a little ahead of the original estimates but fell short of their “mis”guidance. So this stock is probably going to remain beaten down until ELOS delivers on a couple of good quarters meeting/beating estimates and we get a few strong upgrades. In other words, management needs to regain credibility.

- In addition to missing their guidance and management credibility issues, there is the fear of discretionary spending in a recession. ELOS targets baby boomer vanity and folks may not be spending on discretionary items like cellulose when they are facing a recession. This is a fundamental risk of investing in Syneron Medical - this is a good economy stock, the market conditions are not favorable right now for ELOS and we need for that to improve and hopefully for baby boomers to live up to the vanity we expect them to demonstrate.

So though it seems nonsensical for the company to earn more than originally anticipated (but less than the revision) and yet trade for less than it did before the revision, there are at least a couple of reasons for the same. ELOS now needs to prove itself and regain credibility over the next 2-3 quarters. If they deliver on their numbers I can't imagine that the stock will not go up, especially with the prospect of some huge new product releases in 2007. The company has great margins – 47%, its technology offers a concrete differentiating factor, its target market should keep growing at a brisk rate over the next decade, it is growing at 28% and is trading at a P/E of 11.

ELOS may not be a sure thing, because I can see the case where everything goes wrong for the company (after all they have missed numbers 2 quarters in a row now and management credibility Is under serious questioning), but I think the risk-reward is about 90-10 in favor of the long investors - a bet I am willing to take as of today.

I will be watching this company closely and making sure they are not falling short in any of the big assumptions being made in classifying this as an investment for the future and I suggest other readers who invest in ELOS do the same. The company does still show a healthy 69% institutional holding as of 3/31/06. As a reader pointed out (I am yet to verify this data):
- As of May 2006, Fidelity owns 14.5% of shares, more than triple what they owned in October 2005
- Timessquare opened a new position with 1,239,500 shares
- Barclays International added almost 1M shares to their holdings
- 4,161,856 reported shares are short, the highest in 12 months

To conclude, I remain Long and Bullish on ELOS, with the assumption that the sales and marketing costs they incurred in Q1 will help sales and revenues in Q2 and beyond and is a worthwhile investment. The CIBC analyst seems to agree.

Disclosure: I maintain my “very” long position in ELOS and yes, it is hurting but I remain bullish on the company and am hoping for a recovery late 2006, 2007.

Last Updated: May 20^th 2006

ViroPharma Inc., - VPHM

noreply@blogger.com (Anonymous) — Thu, 04 May 2006 20:58:00 +0000

ViroPharma (VPHM) is a profitable biotech company that engages in the development and commercialization of products that address serious diseases. It markets and sells Vancocin capsules for the treatment of antibiotic-associated pseudomembranous colitis; and HCl, the oral capsule formulation of vancomycin hydrochloride in the United States and its territories. The company’s product pipeline includes Maribavir, a Phase 2 product for the treatment of cytomegalovirus infection; HCV-796, a Phase 1b product for hepatitis C virus infection; and Intranasal pleconaril, a Phase 2 product candidate for common cold and asthma exacerbations. It serves pharmacies, hospitals, clinics, and other facilities licensed to dispense prescription medications. The company was incorporated in 1994 and is based in Exton, Pennsylvania.

The company has been under severe selling pressure for a while thanks to a lack of response from the FDA and question marks surrounding this company’s portfolio of products and on what they are planning to do with their healthy $200+M cash balance but mainly thanks to FDA approvals around their $200M drug Vancocin (though even with such approval, the generic versions will hit the market prior to 2009). The shares of VPHM say a healthy bounce after they announced Positive Phase 2 results demonstrating that Maribavir significantly reduces CMV reactivation in late March but even that bounce was certainly short lived as VPHM slowly drifted back to the $11 levels a month after that positive announcement.

But then came the killer. ViroPharma announced their quarterly results pre-market today and the stock plummeted on extremely disappointing earnings. First-quarter profit plunged 53 percent and missed Wall Street's expectations. Net income shrunk to $8.2 million, or 12 cents per share in the first quarter, from $17.4 million, or 36 cents per share, a year ago. The decline was due to a lack of license fee revenue in the latest quarter and a $5.5 million tax expense the company did not have last year. Revenue rose 8 percent to $29.4 million from $27.2 million last year. The vast majority of the recent revenue -- $29.2 million -- was from sales of the antibiotic Vancocin – the drug facing threats of generic competition.

As one of top posters in StockArena.com summarized today (edited):

***
Today was a big miss for sure. I have stayed with ViroPharma because I felt the management was making all the right decisions and felt the market was not giving the company enough credit for their performance and potential.

Today was a wakeup call. I knew that the income taxes were coming but the impact is pretty brutal when you see the year to year comparisons. I think the company has done a good job of analyzing why sales were off. I think the reason for wholesalers may have been that ViroPharma raised prices but modestly which probably lead wholesalers to not worry so much about future price increases. Last year the price increases were aggressive and wholesalers probably felt they were behind the eight ball and they were rewarded for ordering aggressively to benefit from having Vancocin in inventory when prices increased. The blowup over some future generic threat may have also given wholesalers the confidence that ViroPharma would not raise prices aggressively – since the talk was that this generic policy by the FDA was due to them being irritated that ViroPharma was "taking advantage" of the c.dificile epidemic to raise prices.

The bottom line is that with prescriptions written up 39%, this inventory adjustment can't go on forever and Vancocin should return to sales growth in Q2 and onwards.

***

To summarize, ViroPharma has a couple of drugs moving nicely thru their trials and have mentioned they have good cash levels and are narrowing their search for a second or third contributor to current drug sales. With the 20+% haircut in VPHM prices today, I believe VPHM presents a compelling value purchase in the sub $10 levels. Maybe TheStreet.com Stocks Under $10 gang should give ViroPharma a very serious look.

Disclosure: I currently have a long equity position in VPHM and have elected to maintain is through this drop. I do not plan to add on to this position as of now as I have a pretty full position in this company but fully plan to hold my current position. I had also previously written naked Puts with a strike of $10 and a May expiry for a premium of $.45 which are currently trading at $1.15 with about a buck in intrinsic value given the stock is trading close to $9. Unless VPHM recovers to over $9.55 by the May Options expiry date, I will be rolling these naked Puts out to June or August with the same strike price.

Last Updated: May 4^th 2006

SeekingAlpha: This blog also appears in the Biotech Stocks Blog of SeekingAlpha at http://biotechstockblog.com/article/10123

Playboy's Cybergirl 2005

noreply@blogger.com (Anonymous) — Wed, 03 May 2006 05:19:00 +0000

To continue the new "quick blurbs" blogging style, here's one that's bound to generate interest given the buzzwords tagged to it: Barron's, Playboy, Cybergirl, Morningstar, stock-picking contest, Bill Miller :-)

Some of you may have read the update on Amy Sue Cooper's stellar performance in stock picks at the end of Q1. This week's Barron's just printed an article titled "Brains and Booty" on Amy Sue Cooper, Playboy's Cybergirl 2005. Ms. Cooper apparently has quite a penchant for the stock market and is the runaway leader in a Playboy/Tradingmarkets.com stock-picking contest. She has outperformed all 9,771 Morningstar 5 star-rated mutual fund managers with a model portfolio that is up 53.17% YTD!! And she even presents her reasons for the pick and so this may not have been a dart-throw victory:

Amy Sue Cooper's Reasoning: (quoted)

1. Amgen (AMGN), the world's largest biotechnology company, and Abgenix (ABGX), a company specializing in the discovery, development and manufacture of human therapeutic antibodies, announced that they have signed a definitive merger agreement under which Amgen will acquire Abgenix for approximately $2.2 billion in cash plus the assumption of debt. This merger could possibly benefit this company tremendously. I am a nurse so this only makes sense.

2. Indevus Pharmaceuticals (IDEV) this is a pharmaceutical company that has new drugs in the third FDA approval phase. The drugs could possibly prevent against STD's and HIV. This is a risky company, but you have to take a gamble once in a while. Again I am in the health care profession and consider drug companies to be fun investments.

3. Microsoft (MSFT) The reason I am choosing this company is that I wanted a strong technology company. There are currently 600 million personal computers and this number is projected to increase to the billions. Microsoft did well last year and will hopefully continue this trend with new technology ideas that will help enhance the company. Plus Bill Gates is the Man.

4. Dril Quip (DRQ) is a company that manufactures oil-drilling equipment. This company has a chance of doing very well. Especially considering the fact that so many countries are industrializing. Plus it's a drilling company that just sounds exciting.

5. Pacific Ethanol (PEIX). When it comes down to it, I am a tree hugger. We all have to live and breathe in this world why not and make it a better place to live. Recently Bill Gates has invested in this company, hopefully because he is a tree hugger as well. I am hoping that the trend will be to move towards better fuel-efficient cars and this company will benefit from that trend.

Now the question in everyone's minds - will Playboy give Ms. Cooper a financial column and finally validate the tired excuse of "I just buy it for the articles".

"Bill Miller, looking for a fund manager to help maintain your record?"

Last Updated: May 3rd 2006

SeekingAlpha: This blog also appears in the Media Stocks Blog of SeekingAlpha at http://mediastockblog.com/article/10062

Bodisen Biotech Inc., - BBC

noreply@blogger.com (Anonymous) — Tue, 02 May 2006 19:37:00 +0000

Wanted to quickly profile this company as I embrace the new motto of just getting the message across and not worrying about the format.

Bodisen Biotech is not a Biotech firm (I guess one should be happy about that of late or at least until there is much anticipated reversal of the biotech slump - mainly driven by money coming out of the sector and into Gold, Copper and other metals that are enjoying a fascinating bull market!). Bodisen Biotech, Inc. engages in the development, manufacture, and sale of pesticides and compound organic fertilizers in China. The company manufactures approximately 60 packaged products in 4 product categories: organic compound fertilizer, organic liquid fertilizers, pesticides and insecticides, and agricultural raw materials. Its products address grains, vegetables, and fruit crops. Bodisen Biotech sells its products to wholesalers.

The stock enjoyed a great bull run until yesterday benfiting from being profiled on Jim Cramer's Real Money radio show in November 2005 and the market being enthralled with the company's proclamation of "accelerating growth," along with the comment that Bodisen does not anticipate any need to tap the equity markets to fuel future growth. Here are some useful links and required reading about this company if you are planning an investment in this one:

Bodisen Biotech Sees Accelerated Earnings Growth in 2006, Company Has a Strong Balance Sheet with Approximately $26 Million in Cash

The company owns a stake in China Natural Gas Inc. that announced that it will report record revenues and profitability for 2005

And the company has been doing very well, beating estimates consistently and recently announced that they see 'record' 1Q earnings on strong sales

Combine all this with a new product launch and it leads me to believe that BBC's potential market is huge. The company is currently a very small player in China, but if its products really do boost yields by up to 35% while being competitively priced, this could be a lovely story that will unfold over the next decade. This is not a stock for the faint of heart though, as there is loads of volatility and uncertainty, but it could be a massive gainer over time.

Why profile BBC all of a sudden? Well, after having been in and out of BBC for a 2400% annualized return in 2005, I have watched the stock's uptick and languished about having taken it all off the table. But the market presented this retail investor with a second chance yesterday - A top poster in StockArena.com brought the significant downward action on BBC on Monday to my attention and I wanted to share some of his discussion here (edited)

***
BBC's stock got hammered yesterday thanks to an article in the NY Post which questioned the legitimacy of the company because of its relationship with a NY investment firm. The article questions how the company's margins can be so strong if it is selling organic fertilizer, and also questioned motives of a director (a former mayor from Massachusetts) who is serving on the boards of several China-based companies.

With Chinese companies there is always greater potential for corporate malfeasance, but this article did not really raise any true red flags (several points in the article have already been changed - one of the most important being that the article claimed that the company's private placement was "under the table," when in fact it was completely legitimate).

I do not want to completely discount the chance that there could be something ugly going on with the company but I am counting on the fact that there are an awful lot of eyes on the company -- D&T is the reporting accountant, Forbes has twice listed the company in it's "Fastest growing China list," the company is current with its SEC filings, the corporate website is very professional, the company is listed on several stock exchanges (domestic and London), and the private placement previously mentioned was gobbled up quickly. This company just doesn't seem like the farce the article suggests it to be. The CBOE also recently listed options on this equity.

With the precipitous drop yesterday, the company now trades at 9 times analyst earnings estimates for the year. With revenue growth in the 100% range, if the company delivers on its guidance and this article is proven largely innocuous, this stock could be a great pick. There is a great deal of speculation in this play, but for disclosure purposes, I am viewing this as the market giving me a second chance and am grabbing this opportunity.
***

Disclosure: Initiated a position in BBC at market open today at $10.18 and wrote naked puts with a Strike of $10 and a May expiry for a $0.45 premium.

Last Updated: May 2nd 2006

SeekingAlpha: This blog also appears in the China Stocks Blog of SeekingAlpha at http://chinastockblog.com/article/10063

Syneron Medical - ELOS

noreply@blogger.com (Anonymous) — Tue, 21 Feb 2006 03:49:00 +0000

Syneron Medical, Ltd. (ELOS) engages in the design, development, and marketing of aesthetic medical products to physicians and other practitioners worldwide. This is a medium risk play on the rapidly growing aesthetic surgery industry. The company’s products are based on its proprietary electro-optical synergy (elos) technology, which uses the synergy between electrical energy and optical energy. Most companies use only optical (light) energy in the various procedures, and Syneron argues that is dual-use (optical and bi-polar radio frequency) is both more effective and safer. Syneron Medical was incorporated in 2000 and headquartered in Yokneam Illit,

Israel

Syneron’s product line includes Aurora, Galaxy, Pitanga, and Comet, which are used in the treatment of hair removal, rejuvenating the skin’s appearance, and acne; Polaris, which is used in the treatment of wrinkles; and Vela, which is used in cellulite treatment. As technology continues to improve, the baby boomers age, and stigmas surrounding certain procedures dissipate, this industry is expected to grow rapidly. Most estimates are for 25% annual growth for the next five years. The company sells its products directly to users and through third-party distributors.

The Bull case for ELOS:
-The stock has been battered recently, due to Sharon’s stroke and a short-term revenue miss (at its last CC the company raised guidance for the year, but now will miss by $3-4M, which is the exact amount which the company announced it had sold but could not recognize because of shipping issues with the shortened holiday week at the end of the year). Having dropped from $45 to $27 recently, the company has a trailing PE of 20 and a forward PE of 12. With expected growth rates in the 20% range this is an attractive valuation. Note also that from a logistical viewpoint the recent drop makes little sense. In October the company increased its revenue guidance from $84-$85M to $91-$92M, and the stock jumped from $33 into the $40’s. Recently the company announced that it would actually have revenues of $88M, with $3-4M in unrealized sales. This news, coupled with an analyst downgrade and Sharon’s health issues, have sent the stock substantially lower than when the expectations were for only $84-$85M in revenue!

-The company has $114M in cash on hand (with a total market cap of $682M), and no debt, giving it many options in terms of organic development and or prudent acquisitions.

-The company has the highest profit margins in the industry, and has an excellent return on equity.

-Syneron has done an excellent job recently with bundling sales (selling units that can do several procedures), and also offers units that can easily handle add-ons (i.e. incremental sales).

-Future product introductions, particularly a non-invasive liposuction treatment (and a spin-off home-use version) could drive sales significantly higher.

-Analysts currently expect the company to earn $2.11 in 2006. If the company earns ~$2.00 this would be >20% growth, and could easily merit a PE of 25 (especially considering the company’s strong cash position). That would put the stock at $50, a near double from here.

The Bear case on ELOS:
- Syneron has many competitors, and there are risks that its margins could be pressured. That said, I think that as the boomers age and as Syneron enters a host of new markets, top line growth will more than make up for any margin concerns. The stock has been struggling recently and could drop further.

- Analyst estimates were predicated on that extra $3-4M in sales which will end up being recorded next Q because of timing issues around the holidays.

- I've also seen reports that the company's increased hiring will result in some incremental G&A expenses that may have not been fully modeled. Put the lower revenues and higher expenses together and you've got a recipe for earnings that may not meet the all important "analyst estimates." If this "miss" comes to pass, and the markets focus on it (I can just see the comments about "deteriorating margins") the stock could take another hit. Of course the argument can also be made that a miss has been more than accounted for in the stock price.

- The longer term bearish case is predicated on the argument that Syneron's industry leading margins are not sustainable, and that increasing competition will result in falling margins, muting the effect of sales increases. This is a plausible argument, as the natural progression of capitalistic markets is to erode abnormally high margins in the absence of barriers to entry or consistent innovation. The question is whether ELOS does have a sustainable competitive advantage. The company clearly has a differentiating factor in that its products use the dual optical/radio methodology. I'm not a doctor and do not really feel comfortable assessing the efficacy of this versus other methods, but I have no qualms with pointing out that from a selling standpoint, this is a major advantage for the company. The medical institutions performing these procedures are all fighting for the same pool of clients, and there's most certainly a benefit in being able to tout the fact that one's equipment uses a patented, dual-method technology that promises superior results.

Syneron’s product line includes Aurora, Galaxy, Pitanga, and Comet, which are used in the treatment of hair removal, rejuvenating the skin’s appearance, and acne; Polaris, which is used in the treatment of wrinkles; and Vela, which is used in cellulite treatment. The company sells its products directly to users and through third-party distributors. Here’s a link to more information: http://www.syneron.com/vela.html

I believe the company will earn $2.20 this year but let's be conservative and call it $2.00. If you attach a 25 multiple on that - also conservative relative to its peer group multiple of 27 times and its earnings growth rate - you get a $50 stock. Over $100mm in cash, no debt. Huge new product cycle - the VelaSmooth alone, for example, will do more sales in 2007 than the whole company did in 2004. Then there's non-invasive liposuction coming out next year. And a home solution in the works so people can zap their problem areas without leaving the house. Throw in the demographic shift and aging effects on the body.

2006 has been seen as something of a transition year, with Syneron expecting to bring a couple potential huge sellers (the non-invasive liposuction product being perhaps the most interesting), but I think that if the company can deliver adequate results the market will respond quite positively. Right now ELOS is being priced as if its business has hit a major roadblock, but there simply isn't any real indication yet that this is the case.

And on the patent infringement issue that is of concern on all the companies in this segment thanks to Palomar's patent attorneys who have been working overtime. Not only is the company going after Cutera (CUTR:Nasdaq), but Cynosure is also at risk. And other companies in the sector that use lasers or intense pulse light (IPL) -- which is almost all of them -- are also getting nasty legal notices from Palomar. In Cynosure's prospectus, it states: "On July 2, 2004, Palomar Medical Technologies, Inc. sent us a letter proposing to enter into negotiations with us regarding the grant of a nonexclusive license under specified United States and foreign patents owned or licensed by Palomar with respect to our Apogee Elite, Apogee 5500, PhotoLight and Acclaim 7000 products, and also with respect to our SmartEpil II product, which we no longer offer. In subsequent letters from Palomar dated September 14, 2004 and March 24, 2005, Palomar reiterated its willingness to negotiate a license under these patents and, in its March 24, 2005 letter, stated that it continues to believe that we need a license under these patents for each of the products listed in the July 2, 2004 letter, as well as for our PhotoSilk, PhotoSilk Plus, Cynergy, Cynergy PL and Cynergy III systems. We have not entered into negotiations with Palomar with respect to such a license."

Syneron is insolated from any of Palomar's patent disputes because its Electro-Optical Synergy technology, or ELOS, is unique. Other noninvasive aesthetic products rely solely on optical energy from lasers or IPL, limiting the safety and effectiveness of many procedures because optical energy alone isn't able to adequately penetrate the skin. Rather, it undesirably becomes absorbed in the outer layer of skin. High-power optical energy also requires relatively large and heavy equipment, which can be cumbersome and costly. Syneron's ELOS technology adds radiofrequency energy to the mix, and is the first approach to combine electrical and optical energy. So it looks like ELOS will steer clear of all patent infringement claims because its technology is so very different.

In a recent analyst report in December, investment bank CE Untenberg suggested that Syneron is trading at 31% discount to peers (prior to the huge drop in Syneron’s price). Its peer group, by the way, is small medical technology companies, mainly ones making products for laser and cosmetic therapies.

ELOS announced their results in February and there were really no surprises from the pre-announcement in December. ELOS now trades at PE ratios almost half of its major competitors.

From smallest to largest:
-- PMTI 2005 rev 76.2, 2006 rev estimate 93.5, increase +17.3, or 22.7%
-- CUTR 2005 rev 74, 2006 rev estimate 93, increase +19, or 25.7%
-- ELOS 2005 rev 87.4, 2006 estimate 116.5 (I used midpoint of their guidance), increase +29.1, or 33.3%
-- CLZR 2005 rev 124, 2006 estimate 148, increase +24, or 19.4%

So on revenue alone, ELOS is far and away the fastest projected grower. Peer group at 20-26% (CUTR is the highest of the peer group and it has serious patent fight on hand!), and ELOS is still in this "disappointing" #s expected to come in, in the low 30%s

Again, if ELOS was the highest valued in the group on PE, PS etc maybe some haircut in order, but before PMTI's recent fall, ELOS was valued at half the valuation measures of PMTI and still trades at a deep discount to the 3 named above. Yet now it is being punished further.

ELOS has announced an analyst day on March 6th in SF. Other comment on note from their earnings call in February:
- Net margin 45-47% for 2006 down from 51% in 2005, more expense in sales force (commissions, new sales avengues, etc) and R&D more spending
- Q3 2005 was very low in sales expenses which in retrospect in getting the word out about Syneron.
- Gross and operating margin will stay steady in 2006 vs 2005
- They plan to get into a lot of medical conferences in first half of 06 to get word out. "Doctors talking to doctors" is the best marketing. They anticipate the Vela product to be more popular after working through the medical conferences in 1st half of 2006.
- They have been working on the home use product internally for 18 months and the first cycle of clinical trials are already complete. ELOS May also enter into a PMTI and Johnson and Johnson type of distribution agreement with 3rd party big distributors – they are making sure safety is verified before moving forward. The home use product could be in the market by the end of 2006.

Disclosure:

Position: Very long and my largest position in the portfolio as of Feb 20^th 2006. Own both equity and have written Out of the Money Naked Puts with a June expiry.

Last Updated: February 22^nd 2006

GOL Linhas Aereas Inteligentes SA - GOL

noreply@blogger.com (Anonymous) — Mon, 20 Feb 2006 19:02:00 +0000

I have responded to a few queries on what’s my approach to “research” as a retail investor and if I can share my research on the stocks I “track” or own. In response, I have decided to share my research on specific stocks in this blog as and when time permits. I will start with my largest holding ELOS and the international company that fascinates me the most, GOL (though arguably ELOS is international to – an Israeli company that I happen to “track” under a small-cap Medical Appliances and Equipment category.

GOL Linhas Aereas Inteligentes S.A., (GOL) provides airline services on routes between the cities of Brazil. It offers approximately 350 daily flights to 42 business and travel destinations in Brazil and Argentina. As of June 30, 2005, the company operated 34 single-class Boeing 737 aircraft serving 39 destinations in Brazil and 1 destination in Argentina. GOL Linhas Aereas Inteligentes is headquartered in Sao Paulo, Brazil.

GOL which is growing incredibly rapidly began life just a few years ago as the brainchild of a Brazilian bus company. They are copying the early moves of Southwest Airlines very closely - they fly all Boeing 737's so far to standardize training and maintenance and keep costs lower, they are doing a great job of cost containment, and they fly direct routes to where people want to go. It's smart to follow the lead of the most successful airline in the Western Hemisphere, and in doing so they have grown their traffic rates more than 50% in the last year.

GOL is basically an amalgam of JetBlue, Southwest Airlines, RyanAir and the other successful low cost airlines, but it's in Brazil. They are taking the best features of many of these budget airlines that have revolutionized western air travel and combining them into one service that is dramatically changing air travel in the largest country in South America and looking to expand to all of Latin America. But they have also moved beyond that SWA model quickly in one significant way. They are aiming to become not just the airline of choice for Brazil, but for international and domestic flights throughout South America. They have started nearby, with Bolivian and Argentinean flights, and they are even moving into Mexico with a franchise deal has caught some attention as well (though there's plenty of low-fare competition likely in that country, for sure).

GOL is still quite small and an upstart in its home country -- they operate about 400 daily flights and have a market share of around 30% at the moment, but it looks like a great story. The airline was founded by the Oliveira family, which owns and operates a large intercity bus system in Brazil, and this is clearly a family that understands how to build and run a business to move a large population.

The key for me is that GOL is growing quickly and, with the limited amount of research I've done so far on South American air travel, they've got the chance to really become a dominant force given the way they've hit the ground running. So what's keeping me? The stigma associated with investing in any airline given the way the US fliers have performed, and they've already grown and seen their stock appreciate very quickly - it's trading at a PE of about 30, which is not cheap for a Brazilian stock. Bu I do like their growth and their remarkably low cost structure, and the fact that they're not very well followed here in the US – well until recently. Of late they have definitely started to catch the world's attention with their excellent returns, and the number of US analysts on their earnings conference call has gotten significantly higher.

GOL is growing at well over 50% a year and still building out with massive plane orders in place, and they're just starting to tap into debt financing. Recent development suggests that GOL is partnering to bring its model to Mexico. They added routes to Bolivia several months ago ... then Paraguay, Uruguay, and Argentina were announced just in November.

The Bull case for GOL:

--They're following an established strategy, albeit one that hasn't been tried in many countries, in basically mimicking the successful low cost airlines with good service, low frills, and great prices.

-- They are changing the marketplace - not content to just operate a business to serve existing customers, which in Brazil might have been profitable given the significant amount of business travel, they're bringing in people who've never flown before, putting them on their first airplane, and building a big customer base. Like the "Southwest Effect" before them, they're calling this the "GOL Effect" - it's now cheap enough for lower and middle income Brazilians to fly when they never would have considered it before. One of the smart things they are doing is flying a lot of cheap overnight flights - using planes that would be otherwise sitting on a runway and selling much cheaper flights for those unfriendly hours, thereby bringing still more fliers into the market.

-- They have massive insider ownership. Regardless of their actual night flights, this is not a "fly by night" company that will try to take advantage of the hot environment for Brazilian stocks and then disappear. The founding family's company owns roughly 75% of the shares and they're trying to build a business that will stand the test of time and revolutionize South American travel.

-- They have huge advantages over comparable US airlines in cost control. I admit that I still suffer from the admonition "never buy an airline" but GOL seems different. Price controls from the government through Petrobras allow them to have much lower fuel costs than most of the rest of the world. A dramatically different operating environment allows them to provide world class service at developing world salaries without nearly the legacy costs of their competitors -- so their pilots, for example, make about $35,000 a year versus over $200K at Southwest. And unlike the bankrupt Varig, the flagship airline in Brazil, they don't have the same kind of legacy costs as the US carriers. That means they can operate at a profit even while charging rock bottom ticket prices -- right now, the operating margin for GOL is 37%, which blows every other airline I've ever heard of away.

The Bear case for GOL:

-- Currency risk with the recently appreciating Real (R$)

-- Political risk with the leadership scandals and just the general emerging market risks that we take on when we invest outside the established western investor world.

-- Varig, the current flagship carrier of Brazil and GOL's largest competitor seems to be finding its way out of bankruptcy. Varig has been faced with very similar problems to the US flagship carriers in the past couple of years, including a legacy of heavy regulation, huge labor costs, and large liabilities and big debt on the books. There is some risk that their bankruptcy will enable them to dramatically cut costs, as some of the big US carriers have done, which theoretically would enable them to move more toward the low fare model that GOL has followed to great success. Just a remote risk, given US Airways is not a viable competitor for JetBlue and Southwest today, even though they've been through bankruptcy twice! :-)

-- Government regulation of the airline industry was a significant issue 20 years ago in the US, and it can certainly be argued that the removal of regulatory controls dramatically changed the landscape and brought real competition and allowed new entrants to grow into the marketplace, making air travel much more feasible for all Americans. Brazil is not about to deregulate its airline industry, as far as I can tell. The governmental philosophy is dramatically different -- as evidenced by the controlling stake the government holds in Petrobras, the big oil company. The government is committed to letting private enterprise grow, but in my opinion it is also very concerned about directing growth in their economy. The focus on overall steady growth and the lack of a truly free market means that GOL’s competitive picture should remain relatively steady. GOL now has a significant edge over the small upstarts that might fly a dozen or so routes and who want to build their business -- GOL is now an established company with 400+ flights a day, and they can certainly make a stronger argument for their ability to effectively manage additional routes than can a very small and, in most cases, financially unstable competitor. So the way I read the regulatory landscape in Brazil (and I'm no expert on this topic), GOL has some protection from smaller carriers that might try to horn in on it's routes by buying market share with even lower prices, because the government doesn't want to see that kind of instability (prices moving dramatically up and down, small companies betting the farm on their ability to buy market share until they run out of money. Compare with Independence Air for the US version of this cautionary tale).

-- The biggest bear case would be the discussion of if I have sat and watched this too long and if it has already had its run and I am too late for the party. This stock would be a case for Buy High, Sell Higher and is not really “value-priced” (unlike another stock I will blog on today – ELOS)

The reason my interest has really perked up lately, in spite of the excellent run GOL has had:

-- GOL just increased their guidance for 2006

-- Petrobras, which controls prices for oil in Brazil under governmental guidance, just cut jet fuel prices by 5.3%, according to both Investors Business Daily and Marketwatch articles on Feb 15^th. So this aids in GOL’s relatively cheap jet fuel in Brazil, where they do most of their fuel consumption and where prices were already well below international market rates.

Disclosure:

Position: None, but bullish on GOL and looking to buy some on any pull back.

Last Updated: February 20^th 2006

SeekingAlpha: This blog also appears in the Transport Stock blog of SeekingAlpha at http://transportstockblog.com/article/8729

Identix Inc., - IDNX - An arbitrage opportunity

noreply@blogger.com (Anonymous) — Mon, 23 Jan 2006 02:50:00 +0000

Arbitrage also known as “riskless profit” is the most satisfying way to make money that I have experienced. It comes without much of the hassles of speculation and takes a lot of uncertainty of the stock market out – more often than not, you know exactly what return you are going to achieve and by when you will achieve the same in an arbitrage situation. At a very basic level, an arbitrage refers to the simultaneous purchase and selling of an asset in order to profit from a differential in the price. And to make it difficult for the retail investor, any financial professional can start talking to you about statistical arbitrage vs. market arbitrage vs. convertible arbitrage vs. index arbitrage and about futures spreads and box spreads – maybe even just so you think this is very difficult. And maybe it is. But there is always that simple case of “Merger Arbitrage” that any retail investor can use to make a nice return on investment. This is a popular hedge fund strategy, with which the stocks of two merging companies are simultaneously bought and sold to create a riskless profit.

So are there risks? Absolutely. Nothing is quite riskless. Risks include the merger no going through thanks to variety of reasons including say the LBO (Leveraged BuyOut) firm backing off the deal to the deal not getting the regulatory and anti-trust approvals. But in most cases, the situation is very straight forward and you know when a deal is going to go through and you know when a deal “may not” go through – and you are best served keeping far away from them. There are plenty of arbitrage deals to make money out of – no need to chase the doubtful ones.

Personally, I have never lost money in an arbitrage deal – ok, I lie, I panicked on two occasions and lost money, but in both cases would have made money had I simply not panicked. Panic is the retail investors’ first enemy. To give a little more detail on those two occasions – HLYW and ABS. Hollywood Videos traded at a nice spread of more than a $1 on a $13 investment and when the LBO firm backed out, HLYW plummeted to $9.5 and I was happy to take the bounce off a $11.5 renegotiated price and cut my losses, though I was fully aware that a bidding war was going on with MOVI and BBI also bidding for HLYW. Sure enough, had I even waited a week, I would have made not just the $1 spread I was aiming for, but $1.5 for a sweet 47% annualized return. I repeated the mistake again with ABS – a company that has clearly announced it was for sale but rejected the $26 bid – the stock dropped to $2.5 below my cost basis and I cut my losses again only to read the news (released minutes before I author this blog) that they are in talks to accept a slightly higher bid.

In any case, the most important thing here is to depart with the lesson learnt from these two mistakes and the answer is found by thinking about the fundamental reason for my panic. Both Albertsons and Hollywood Videos are companies that I would never ever dream of buying even if someone paid me to do the same (ok, I lie again – if someone paid me, maybe I would buy them depending on what they paid). Which leaves me with a basic rule – stay away not just from deals that have a risk of falling through, but also from stocks that are fundamentally bad and arbitrage is the only thing going for them. To date, I have played the merger arbitrage game 27 times and made a decent 12-29 % annualized return in each of those cases.

Now that we have the arbitrage rules out of the way, what’s the best arbitrage situation in the market as of today. IDNX. Viisage Technologies announced a buyout of Identix Inc., for an all stock deal (which is second best for merger arbitrage next to all cash) – you get 0.473 shares of VISG for every share of IDNX and the merger is set to close in the first half of the year with a few websites slapping a date of 5/17/06 for the scheduled close of this merger. As with all stock mergers, you short the acquirer and buy the acquired and most discount brokerage houses (I use TD Waterhouse and absolutely love it and am anxious about the Ameritrade buy out – I like my TD Waterhouse the way it is – please don’t change it) automatically match up your short with the new shares of the acquirer received upon closure of the merger and all positions are closed. On Jan 12^th, I went ahead and shorted 2365 shares of VISG at $16.60 each and for the $39270 received, bought 5000 shares of IDNX for $35150 and pocketed the $4120 spread for about a 25% return (are you salivating yet?!!) if this deal closes in 6 months which I am pretty positive that it will.

A curious retail investor (or maybe a skeptical one) had questioned my post on the Yahoo! IDNX message board touting this great arbitrage deal.

“doctorsmith99” asked: “what's the risk on this spread? seems like you could just multiply the shares involved by 100x and pocket a cool mill? what's the catch??”

I had responded on the message board and will include the response below to complete this blog.

Response: “All arbitrages have risk - a risk of the deal not getting approvals, a risk of a LBO firm withdrawing its bid, a risk of the acquired firm reporting bad results making the acquirer walk away from the deal etc., The reward for the risk is the spread. In this case, personally, I believe the risk is very low. So I am willing to take the low risk for a good return.

Regards making a million, here is a simple calculation. As you may have noted, the spread has increased from $8000 on a $70000 investment to $12000 on a $78000 investment on Friday's trading in which VISG was bid up a lot more than IDNX. So even better for us arbitragers.

So yes, you could make a million from this - if you had $6.5 million to buy IDNX shares, then you could make a million from this arbitrage deal - that is your catch. :-) I know I do not have $6.5 million.

And in case you are wondering, "But I can short VISGD for $7.5 million and buy IDNX for $6.5 million of it and pocket a million", well you can, as long as you find someone who will "loan" you $7.5 million for your promise to settle it in a couple of quarters when the deal closes :-) That's how shorting works - you are borrowing from your broker.

Hope this helps. Take care and good luck "doctorsmith".”

Bottom-line, the VISG-IDNX deal offers a cool spread with very low to no risk for an excellent return to the tune of 25%

Last updated: January 22^nd 2006