Description
Summary: Lumenis has had a checkered history but has been working diligently to clean up its business and get back on a growth track. If it is merely able to hit the lowered $1.25 eps target, the stock could double from the current price.
Lumenis is a somewhat controversial company which supplies laser equipment into the aesthetic and medical markets. Formerly known as ESC Medical Systems, it underwent the name change to Lumenis subsequent to the purchase acquisition of the Coherent Medical Group. It is a controversial company because it had (hopefully this is in the past) some new-age accounting habits - these included frequent restructuring charges, impressive reported revenue growth but minimal actual growth (due to purchase acquisition accounting), aggressive pre-acquisition accounting and stuffing of the distribution channel. It also had poor accounting controls and management was distracted by merger integration issues. There were also some negative reports published by some forensic accountants. Consequently, some very smart short sellers had taken significant short positions and were rewarded for their analysis as the stock declined from the high 20's into the high single digits. It is believed on good evidence that these shorts have covered and have gone elsewhere.
So the natural question is why should any investor have faith in the company and is the potential reward worth the risk of such a situation? I believe that the answer is yes due to the following:
1. The first call consensus estimate has declined to $1.44 from $2 prior to release of the fourth quarter results. This is based on a revenue run rate of $400mm (from $440 mm previously) and ebitda of $80mm. Based on our own field work and discussions with the company, we believe this is an achievable number and is slightly below internal targets on which the bonus plan is based.
Even assuming a $1.25 'clean' eps, LUME is trading at about a 9 p/e multiple. This is low for fundamentally a growth company. Revenue run rate for 2002 should be in the low teens and subsequently should be in the mid-teens. This should lead to eps growth of 20%+ going forward.
2. 2002 Ebitda is 80mm+. With an EV of about $500 mm, this is trading at 6x, a low multiple for this business.
3. Liquidity concerns have been alleviated with the signing if bank agreements in recent days.
4. A new CFO has been hired to beef up controls.
5. Significant insider buying in recent days. This supplements the already high management ownership. In addition, there is no abuse of stock options.
6. The laser business in the aesthetic and medical area is basically a good, growth business and at least on the surface offers several advantages over conventional procedures for treatments such as hair-removal, photo-rejuvenation, bph etc. The company also has additional products pending approval and in the pipeline
The first quarter is also expected to show declining year over year revenues and another charge from the recent refinancing. Cash flow will also be negative due to some Coherent accruals. However, the second and subsequent quarters should be clean and show growth. The SEC investigation is also of concern but expected to be a 'low-grade' one.
Target price is $18.75 based on 15xeps for 2002. If company performs it should move to the previous high of 30 in 2003. Downside is to the recent low of $7. We believe there is a good 70-80% chance of hitting these numbers.
Catalyst
The recent bank refinancings have removed any liquidity and dilution risk. The next catalyst will be when the company reports clean numbers in the second quarter.