First and foremost, I have to give that rule-breaking Jim Cramer a big thanks. Not two weeks after I called out Syneron (NASDAQ:ELOS) as the best small cap for 2007, big Jim gave Syneron the ol' "booyah," which sent the stock popping 8.6%.
While Cramer focused on the company's new dental lasers, another area that had been simmering in the oven sent the stock soaring again today. Syneron's current revenues come from sales of the company's various energy-based beautification systems into professional environments, such as doctors' offices. Today, Syneron announced a 10-year exclusive agreement with consumer-goods giant Procter & Gamble (NYSE:PG) to market its planned home-use product.
As far as the market potential, I'll echo what the company said on today's conference call: There's probably no need to convince anyone of how big the market is for a home-use product that makes people look younger and their skin look better.
Syneron will be responsible for development and manufacturing of the product, while P&G's $21 billion beauty business will be the marketing force behind it. Syneron is also hoping for some halo effect from the new consumer devices to increase awareness for Syneron products in professional settings.
The real question for investors, though, is how these new products will impact the company's financials. The most obvious effect will be on the top line -- these new products will give Syneron exposure to a much larger market and should drive significant revenue growth. The company will also be unloading a lot of the operational expenses, such as sales and marketing, associated with the new products. Operational costs have been weighing on Syneron's bottom line as it competes heavily in the professional market with competitors like Cutera (NASDAQ:CUTR) and Palomar (NASDAQ:PMTI) (which has been working with P&G subsidiary Gillette on home-use hair-removal products since 2003).
On the flipside, the home-use products are expected to sell for less than $1,000 and should have a far lower gross margin than the 85% that Syneron enjoys on its current products. Details on the economics of the link-up were slim, but in an outstanding comment, the company's chairman quipped that there will be "lots of room for everybody to make lots of money" while still putting out a reasonably priced product.
I continue to be wary of the outsized growth of Syneron's operational expenses, but the numbers it released for the 2006 fiscal year show strong top-line growth and very satisfying gross margins. This new agreement should be a big positive for the company in helping it to diversify its business and continue to strengthen its brand.
Shed some more light on light-based beauty:
Crazy for small caps? So is the team at Motley Fool Hidden Gems! You can try the newsletter free for 30 days.
Fool contributor Matt Koppenheffer hopes that Syneron's home-use products are still around when it's time for him to iron out wrinkles. He owns shares of Syneron, but does not own any of the other companies mentioned. The Fool's disclosure policy keeps you looking young and fresh.
