Aesthetic-laser maker Syneron (NASDAQ:ELOS) will report first-quarter 2007 financial results on May 14.

What analysts say:

  • Buy, sell, or waffle? More than half of the analysts covering the Motley Fool Rule Breakers recommendation see it burning up the market. Five rate it a buy, while four say hold.
  • Revenues. Sales are expected to be white-hot, growing 20% in the quarter to $28.6 million.
  • Earnings. Profits, however, are expected to drop 14% to $0.32 per share.

What management says:
In terms of aesthetic-laser name recognition, Syneron hasn't been much of a household word. Palomar Medical Technologies (NASDAQ:PMTI) and Candela (NASDAQ:CLZR) have received much more recognition than Syneron has, yet the latter has been churning out impressive records of revenue and profit growth. The company has continuously invested heavily in research and development, and at times that aggressiveness has eaten into operating profits but should pay off down the road, particularly with agreements like the one it recently recorded with Procter & Gamble (NYSE:PG) to develop home-based lasers.

Syneron's R&D investments are the foundation for future growth, although, as CEO David Schlachet noted, "Our investments in marketing, [in] build-up of our sales force and channels, and in R&D affected our profitability last year."

What management does:
Much of Syneron's eye-popping profit margins have been helped along by a 2003 Israeli tax law that allows the company to pay virtually no taxes. It's a powerful competitive advantage, but one that could knock the legs out from under the company should the laws change and it has to start paying tax rates comparable to those paid by Palomar, Candela, or even Cutera (NASDAQ:CUTR).

Margins

12/05

03/06

06/06

09/06

12/06

Gross

86.9%

86.7%

86%

85.3%

84.9%

Operating

47.6%

43%

47.5%

42.7%

36.6%

Net

47%

45.7%

44.4%

38%

33.9%
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:
I used to group Syneron into a niche of dental-laser companies but have since been disabused of that notion. Although it continues to expand its presence in that field, such as its agreement with Flourinex Active to develop advance fluoridation and tooth-whitening devices for professional and home use, its lasers are also widely used in traditional aesthetic markets of skin rejuvenation, hair removal, and the treatment of acne, spider veins, and cellulite.

With a market cap surpassed only by Palomar and about twice the size of any of its nearest competitors, as well as being free of the tangle of patent-infringement lawsuits with which Palomar has blanketed the rest of the industry, Syneron can still grow in the burgeoning aesthetic-laser industry ahead of much of the competition. Yet investors need to watch margins, which continue to contract despite a heady advantage in the tax burden.

Syneron is no longer priced to perfection, and its multiples are comparable to industry leader Palomar. The danger is the market's reaction if profits continue to fall and become more in line with the industry rather than lead the industry, or if one of its competitors should develop the next great thing in aesthetic lasers.

Related Foolishness:

Syneron has earned a perfect five-star rating from Motley Fool CAPS, the new investor-intelligence community. You can add your voice to the new stock rating service by joining today. It's free! Syneron is also a recommendation of Motley Fool Rule Breakers, where a 30-day trial subscription lets you hone in on all of the market's cutting-edge contenders.

Fool contributor Rich Duprey owns shares of Candela but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.