Foolish Forecast: No Sizzle at Candela

Aesthetic laser maker Candela (Nasdaq: CLZR) will report third-quarter 2008 financial results tomorrow, April 23. Let's see whether investors will get burned once again.

What analysts say:

• Buy, sell, or waffle? All of two analysts have focused their attention on Candela. One rates it a hold and the other, amazingly, a buy. However, rivals like Palomar Medical Technologies (Nasdaq: PMTI), Cynosure (Nasdaq: CYNO), and Cutera (Nasdaq: CUTR) have three to four times the following in the analyst community, which speaks volumes about the quality analysts assign to Candela.
• Revenue. Both analysts have a consensus view that sales will come in essentially flat from last year -- average the two and you get $38.7 million.
• Earnings. They're unanimous in their opinion that the $0.07-per-share profit Candela earned last year will flip to a $0.07-per-share loss this time around.

What management says:
Management says a lot of things about why sales never seem to materialize. Rarely is it the company's fault. Its new skin-flattening technology, which is supposed to revolutionize sales and provide a recurring stream of revenue for the aesthetic laser maker, has been put on indefinite hold. New product introductions have not been achieving market acceptance, and such lines contribute to just a quarter of revenue, down from 40% a year ago. And the economic slowdown in the U.S. has caused domestic revenue to fall below 40%, becoming a smaller component of operations as time goes on. President Bush, where are our economic stimulus checks?!

What management does:
Lose shareholder value!

Although activist hedge fund manager Daniel Loeb has significantly reduced his position in Candela -- whether from a need to shore up withdrawals, or because of bitter disappointment with the management team -- the potential for a "strategic initiative," such as selling the company, always remains present. As management has squandered the opportunity to create a world-class laser company, it has dwindled to become essentially a penny stock. At such a low valuation, Candela could make a prime acquisition target. One imagines shareholders would hardly object.

Margin	12/06	03/07	06/07	09/07	12/07
Gross	48.9%	48.9%	50.5%	49.8%	49.5%
Operating	8.5%	5.0%	2.3%	(0.1%)	(3.9%)
Net	8.3%	6.2%	4.2%	1.3%	(2.4%)

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
There's little hope that Candela can make a promising long-term investment at this point. It is engaged in a legal battle against Palomar that seems to amount to a Hail Mary pass down the field. If it's victorious in its claim that its rival infringes on its patents -- and it engaged in a bit of jury shopping by filing one of its suits in the patent-friendly East Texas District Courts -- it will be entitled to royalties that would shore up its faltering sales. Yet Palomar has run a string of victories against smaller rivals in defending its patents. One thing that is clear is that both sides are bleeding each other in court.

Candela reported a 44% increase in SG&A expenses last quarter (50% of its revenue), which it partially attributed to the lawsuit with Palomar. For its part, Palomar saw its general and administrative expenses more than double last year, primarily as a result of enforcing its patents. If there will be any winners in this, it will be the lawyers.

While Candela has pulled a surprise or two out of its bag of tricks at different times, the overall theme for its operations has been one of disappointment. It's far easier, then, to go into earnings expecting the worst and being pleasantly surprised, than expecting the best and coming away with singed hair.

Related Foolishness:

• Candela's Amazing Shrinking Quarter
• Candela Investors Burned Again
• No Point Man at Candela
• Foolish Fundamentals: Margins