Extreme Makeover: Vanity Wave

05/14/2004 12:00 am EST

Focus:

Tobin Smith

Founder and Chief Research Analyst, NBT Equity Group

"Our ChangeWave research told us last year that one of the biggest growth waves in healthcare was elective cosmetic procedures," says Tobin Smith. "Now new hit shows like Extreme Makeover and The Swan reflect this popularity." Here’s his favorite way to play this trend.

"We’ve been building a case over the last year for the baby boomer wave of instant gratification cosmetic care via laser procedures. In vanity healthcare, the numbers are enormous. About $2.2 billion was spent on laser hair removal alone, and this area is expected to grow at a 30% rate to over $5 billion by 2007. With more than 78 million boomers in the US, and a majority of them under 50, this will be another historic boomer wave. Add in tattoo removal, acne treatment and repair, wrinkle removal, burst blood vessel, and other facial scarring removal, and you have a multi-billion-dollar growth wave being fueled by affluent boomers hitting 50.

"Candela (CLZR NASDAQ) is the stock I like best to ride this wave. It has the best overall technology portfolio and has the best international distribution. According to over 1,000 board-certified dermatologists, they continue to sell the best-in-class laser products for each of its major markets. Their traditional customer base includes plastic and cosmetic surgeons, and dermatologists. Recently they have ridden this wave of demand and expanded to a broader group of customers consisting of general practitioners and certain specialists including obstetricians, gynecologists, and general and vascular surgeons.

"Candela announced a quarterly blip in earnings due to an aggressive sales move with their newest Vbeam pulsed dye laser product. The basic news is this was a strategic tactic that is a short-term blip and not a reduced earnings or growth trend. The stock fell sharply on the news, and if you do not have a position in CLZR for the aggressive portion of your portfolio, you just got a big opportunity to start one. According to CEO Gerald Puorro: 'We saw a window of opportunity to take market share for the long term by building a significant referral base in a short period of time through initial aggressive pricing terms.' In other words, they cut prices to practitioners if they bought a new machine and lots of supplies. His new forecast based on this pricing strategy is for full year revenues to reach to approximately $100 million. This level of sales is above my previous growth target for the company. I believe this is great news buried in this negatively-perceived short-term aggressive marketing move. These guys have hit every target I've had while following them over the last 12 months, and I take this guy at his word on this one.

"Meanwhile, the GentleLASE family is finding success in leg vein and hair removal for dark skin types. The CEO says it’s the single best new product launch in their history. They are selling the laser to all types of MDs and sold 100 lasers at a discount to get a jump on the competition. They say the fourth quarter will have the highest margin in the company’s history. Candela expects to grow by double digits again this year and next with a new hot product they see 33% top line and bottom line expansion. Overall, with the explosive growth of their GentleLASE hair removal system, the new Smoothbeam treatment for acne and an expanding system for psoriasis, and their Vbeam system for crow’s feet removal, they are perfectly positioned to ride this wave."

(Money Show Digest Editor's Note: For full disclosure purposes, I would note that my father holds this stock in his portfolio.)

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