Considering the top-notch numbers Candela (NASDAQ:CLZR) tallied last quarter, many investors expected similar success in the aesthetic-laser manufacturer's just-reported third quarter. Though the company turned in another robust set of numbers, it didn't quite meet optimists' expectations.
Candela generated a respectable 22% increase in sales and an equally respectable earnings performance. Net income was $5 million, or $0.21 per share, compared with a loss of $1.4 million, or $0.06 per share, in the year-ago quarter. Nonetheless, the stock sold off by 3.5% before the earnings release and then fell another 7.5% in after-hours trading.
CEO Gerald Puorro's been known to needlessly raise expectations before, only to see them punctured by reality. Still, he did intimate that the second quarter's performance should repeat itself going forward. We didn't have 33% growth this time, to be sure, but Candela's results were hardly disappointing. The ensuing sell-off may have stemmed from poor expectations management, or from investors seeking to lock in profits after the past quarter's impressive run.
The conference call offered no surprises. Domestic sales accounted for 48% of revenues, while international sales were 52%. Gross margins stayed in the targeted 50% range, though they were slightly down because of marketing expenses at two shows. The deal with medical products distributor McKesson (NYSE:MCK) is progressing as planned. Yawn.
One analyst asked whether Candela had any specific plans for the large cash position it was building. Puorro replied that the company is always seeking acquisitions and other opportunities, but only if they made sense. With competitor Lumenis now having officially settled its problems with the SEC (for its part, Lumenis neither admitted or denied any wrongdoing), this Fool thinks it might make an attractive target. Lumenis was forced to delist from the stock exchange for its transgressions, so Candela might be able to cheaply acquire Lumenis' patent portfolio.
Despite Candela's decent showing and growing cash position, its results did not match those of Palomar Medical Technologies (NASDAQ:PMTI), which reported a 32% increase in revenues and a 78% increase in net income. Of course, Palomar is starting from a smaller base, but it's hard not to believe that the company is encroaching on the Candela's market-share numbers, despite Puorro's insistence that his company is maintaining its share. Since the companies have different fiscal years, a look at trailing-12-month sales shows Palomar growing at 35%, with only 23% growth for Candela.
I'm not nearly as disappointed as the markets apparently were with the laser maker's performance, but I am wondering what the fourth quarter's numbers will look like. If historical trends hold true in the fourth quarter, Candela would need to generate about $53 million -- $161 million for the year -- or 30% growth overall. Yet analysts are only estimating $46.6 million and $153.8 million, respectively.
Candela Quarterly Revenues, 2002-2006
|
Revenue |
2006 |
2005 |
2004 |
2003 |
2002 |
|---|---|---|---|---|---|
|
Q1 |
28.1 |
22.4 |
18.7 |
13.8 |
10.4 |
|
Q2 |
37.7 |
28.2 |
23.9 |
18.6 |
14.2 |
|
Q3 |
42.3 |
34.7 |
27.7 |
22 |
16.1 |
|
Q4 |
-- |
38.6 |
34.2 |
26.4 |
20.9 |
|
Total |
108.1 |
123.9 |
104.5 |
80.8 |
61.6 |
Because last year's fourth quarter was comparably dismal, it seems that whatever numbers Candela posts, they'll shine by comparison. I'd estimate 25% growth, or around $48 million in revenues. Candela's two premier lasers -- the GentleYAG and the recently introduced Vbeam -- should continue their strong revenue contributions, while its partnership with McKesson and more than 100 of its sales reps ought to expand sales domestically in Candela's non-core markets.
Candela's not a cheap stock at these prices, even with the sell-off. I wouldn't recommend buying, but I don't recommend selling, either. Whatever issues the laser maker had over the past few years, they seem to have smoothed themselves out, and I would look for buying opportunities in the mid-to-high teens.
Hone in on the laser market with further Foolishness:
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Fool contributor Rich Duprey owns shares of Candela, but he does not own any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
