I'm not sure whether an investment in aesthetic-laser maker Candela (Nasdaq: CLZR ) has been one of conceit or deceit; at times, it's strayed very close to the latter. Yet the latest earnings report indicates quite clearly that whatever advantages the company once held, they've pretty much dissipated by now.
Where Candela was once clearly the industry front-runner, the field is now wide open. It might still have the largest revenue, but competitors including Syneron Medical (Nasdaq: ELOS ) , Palomar Medical Technologies (Nasdaq: PMTI ) , and Cynosure (Nasdaq: CYNO ) are all poised to supplant Candela.
The economic slowdown has affected the field of aesthetic laser surgery: Domestic revenue for Candela has fallen to 39% of all revenue, from 45% in the year-ago quarter. Yet with the field so crowded, the players are also cannibalizing each other's customer bases. There's no real differentiation among the products, and the one area where Candela might have been able to stand out -- the introduction of its pneumatic skin-flattening technology, which reduces the pain associated with laser therapy -- is now on an indefinite release delay. (Candela had planned to unveil the product by midyear.)
In fact, many of Candela's new products are having trouble in the marketplace. In its fiscal first quarter, new product sales accounted for 41% of product revenues, but that figure dropped to 27% this quarter.
Of course, that hasn't stopped management from doling out half a million stock options, with the lion's share going to CEO Gerard Puorro. Not bad for a company that has seen its share price drop more than 60% over the past year. Puorro defended the grants, as management often does in such cases, by saying they were needed not only to attract talent (although he got one-fifth of the outlay himself), but also as an incentive to turn the business around. That's putting the cart before the horse. Perhaps the company ought to grant the options after it's achieved its goals.
This management team, however, has often displayed little regard for shareholders over the years, and there's little clarity going forward on what Candela can do to change its falling market share. Members of management mentioned that a home-based product is on track for 2009, but management's timetables are not reliable. Heck, they couldn't even say whether there would be a profit this year.
Company managers are conserving their cash now, so they haven't made any share buybacks, even though the stock sits at record lows. Nor are there any buyback plans for the future. That tells me that hard times are still ahead, and with legal expenses from its lawsuit against Palomar consuming significant portions of earnings, Candela will be mired in the muck for some time.
The laser maker's best move -- with potential benefits for the entire industry -- might be to sell itself to a competitor. Although management wouldn't discuss whether it's considering "strategic alternatives," a sale would create a dominant industry player big enough to drive home economies of scale. Cynosure and Palomar are two rivals of sufficient size; both have been growing market share, and both might be able to benefit from the suite of products Candela offers. And a pairing with Palomar would put an end to the internecine legal battle the two are waging. Yet even Cutera (Nasdaq: CUTR ) has surpassed Candela in market cap, though it probably remains too small to swallow up its competitor.
Falling revenue, mounting losses, performance impaired by legal battles, and a management team willing to reward itself at shareholders' expense means that Candela will be an unfocused investment for some time to come.
You, however, can focus on the laser industry with these related Foolish articles: