Sniffing out the FDA Triple Play stock from the Publisher’s Series

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As Ebola dominates the news, another epidemic quietly runs amok on U.S. soil.

It’s the proliferation of tattoos.

45 million Americans are tatted, but nine million of them wish they weren’t.

Yet while they’d like nothing better than to remove their hated tattoos, they’re afraid of the pain and cost of conventional treatment.

That’s all changed

Now there’s revolutionary technology that’s giving those with tattoo regret a new lease on life

Thats the intro to the latest over-the-top pitch from the WSD folks for their Publishers Series. the relatively low-cost newsletter they launched recently and that we covered just last week. But lots of folks chimed in and asked for a solution to this one, so solve it we shall.

So why Tattoo Removal? Well, it is a big business though perhaps not as big a business as tattoo parlors, given the incredible prevalence of tattooing in our society now. And as the super-tattooed generation tries to move into the staid workplace and wear long sleeves to cover up their dragons and lightning bolts, Im sure tattoo removal is growing though whether tattoo removal catches on in a hugely profitable way probably depends more on whether society continues trending toward greater tattoo acceptance as the heavily inked Millennials age.

I think my generation (Im 44) is probably the last to have the near-consensus that tattoos mean youre a crazy degenerate or an outsider or some similar opinion, and I live in an extremely well-tattooed part of the world, but body ink still throws me off a little bit and catches my eye and it still stands out as shocking in some situations, if your doctor or your lawyer has a big, visible tattoo it does force a double-take.

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But more importantly, can you imagine a better way to appeal to the grumpy old man demographic than to say that these dang kids are finally going to be able to get rid of the tattoos of their foolish youth? After all, the grumpy old man demographic has been the core target market for financial newsletters since that group was furious with Jimmy Carter almost 40 years ago.

So yes, grumpy old men are probably being pandered to a bit here by the copywriter and Im a grumpy old man in training, so the ad caught my eye, too. How is it possible that all these people wont want to have their tattoos removed if that technology is getting faster and better?

Which gets us back to the point whats the tattoo removal stock being teased by Robert Williams for The Publishers Series. Lets check the clues he provides:

With this powerful new laser technology, the company behind it is in prime position to seize the market from current cosmetic laser treatments… and create a brand-new market for the accelerated removal of tattoos.

But it gets even better…

FDA Approves the New Laser for the Treatment of Acne Scars

Its approval hit only a few weeks ago, and could DOUBLE the company’s market in the coming months (as well as its stock price).

Over 60 million Americans suffer from the condition, and a third of them – about 20 million – have severe enough acne to cause scarring.

Enter this new laser, which is the only one of its type with FDA approval to remove these scars.

And apparently this is not a brand new or breakthrough company, theyve been a cosmetic technology company for a long time

it’s been in business since 1991, with its technology being considered state-of-the-art for hair removal, skin rejuvenation, and the removal of unwanted fat.

The company’s solutions include a variety of products that are sold to dermatologists, plastic surgeons, primary care physicians, obstetricians, and gynecologists in 120 countries.

It also holds the rights to 37 patents, and markets over 14 different light-based systems.

OK, so we know that the retiring baby boomers have been pushing the cosmetic rejuvenation market nicely forward for a decade or so, and will probably continue to be more active and youthful and youth-seeking, on average, than previous generations of senior citizens (and, unlike many young tattoo regret patients, they actually have money). Thats why Valeant is fighting so hard to take over Allergan and its incredible Botox franchise.

So thats a good market to be in, all else being equal. Any more clues about this specific stock?

Revenue rocketed to $72.6 million in Q2 2014, a jump of 45% for the same period in 2012.

Much of the increase comes from a recent acquisition of a major competitor.

In fact, the company has acquired several competing firms over the years, which has added even more strength to its position as a leader in aesthetic technology.

So thats plenty for us to get an answer out of the Thinkolator for you: theyre teasing Cynosure (CYNO), which does indeed have a variety of mostly laser-related devices used for cosmetic treatment, including more established markets like cellulite/fat treatment/shaping, hair removal, etc. in addition to the relatively smaller markets like tattoo removal or their new picolaser indication for acne scar treatment. They also, just this morning, announced that they received FDA approval for wrinkle treatment with the PicoSure system.

Which sounds like it should be a big deal, given our national obsession with wrinkles, but I have no idea how effective the treatment might be or what the competitive landscape is like for wrinkle treatment. They also will be earning royalties on the first home-treatment laser device for wrinkles, being launched by Iluminage this Fall (Illuminage is a joint venture of Unilever and Syneron, not sure why theyre paying royalties to Synerons competitor Cynosure).

The company has been gradually improving their margins and aiming to boost them a few more points, and they say that their target markets in aesthetics generally have very favorable growth prospects in the 5-10% range and they are continuing to make acquisitions to try to grow the company, including a small acquisition a couple weeks ago of a company that makes radio frequency machines for aesthetic treatments.

The one real direct competitor of similar size (ie, its not a part of a massive medical device company) that Ive seen is Syneron (ELOS), which has been a substantially better stock over the last couple years despite the fact that CYNOs operating metrics are maybe a little bit better, and theres also the much smaller Cutera (CUTR) and probably others, including subsidiaries of those and other larger firms as well as some nonpublic companies I did a quick search at MedicalExpo and found 48 companies offering dermatologic laser treatment systems of one type or another.

The fact that CYNO is selling their new PicoSure devices with a disposable lens caught my eye, because to an investor that means recurring revenue if you have to buy a new lens for each patient but I assume their competitors are probably all doing something similar, there isnt a medical device company in existence that hasnt paid close attention to the success of the razor and blade model as applied in their field, with one notable example of profit being the Da Vinci surgical robot with its required semi-disposable attachments to ensure a profit per surgery by the company.

CYNOs PE is about 19 based on the trailing four quarters of earnings, and they trade at about 15X expected earnings for 2015, so that looks pretty reasonable, but if I were considering investing in this one Id take some time and read the latest reports and presentations from all the competitors to see what the market looks like the distinctions or competitive advantages between the different companies are not readily apparent to me, which makes me more comfortable with the larger and more reasonably priced player (which is CYNO among those three), but there are many, many ways to lose money by investing in industries if you dont understand the competitive dynamics at all. Do we have some volunteers who can go get their tattoos removed by the various different pico lasers so we can see if theyre any different?

Thats about all I can tell you its your money, so its your choice does CYNO sound like an intriguing play on tattoo removal, laser aesthetics, or whatever else? Let us know with a comment below.

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