Biolase: Painless Denistry

06/18/2004 12:00 am EST


Michael Murphy

Former Editor, New World Investor

There's no doubt that most of us view dental surgery as a rather unpleasant experience. The latest recommendation from Michael Murphy is a firm that has developed a water-based product that reduces the trauma and pain. Here's his review.

"BioLase Technology (BLTI NASDAQ) is a medical device company producing lasers for dental, cosmetic, and surgical work. They’ve been at this for more than 15 years, and their big seller is the Waterlase. It cuts both soft tissue like gums and hard tissue like teeth without damaging nearby tissue or cracking tooth enamel. They also sell the LaserSmile system to whiten teeth. Both devices are approved in the US, Canada, and Europe. The Waterlase, which was 78% of sales last year, combines precise control of a jet of water and the laser tip to replace dental drills and scalpels. Dental procedures involve less trauma and pain, often requiring no anesthetic, and patients recover faster.

"A pain-free filling or root canal seems like an easy advantage to market, and BioLase has seeded many markets with dentists who now have a compelling advantage over their competitors. The laser system costs $50,000, and the company has placed 2,000 systems since it was approved in the US in 1998. There are 140,000 dentists in the US that perform over 200 million hard-tissue procedures each year, and another 550,000 dentists in the rest of the world. This is a huge market, and BioLase has the best solution.

"BioLase is a great trading opportunity because the June quarter, to be reported July 23, should be north of $16 million in sales and six cents earnings per share. Sales will be up 54%, year-over-year, and 11% sequentially. Yet the stock is down about 30% from over $21 in January and has a whopping 8.9 million shares sold short. That’s 16 days of average trading volume, which is a heavy commitment by the short sellers. It’s also over 36% of the outstanding shares. In the earnings conference call, I expect management to guide for strong September quarter growth to $18 million in sales and eight or nine cents earnings per share. That could set off a short covering frenzy that would put this stock back to the January highs or higher.

"We’d note that the shorts based their strategy on questions regarding the legitimacy of sales to its Australian distributor, Dental Medical Technologies. That company already stated that they have paid for the inventory they hold, and their inventory levels are normal. In short, no problem here, mate. Their second argument is that something is fishy between BioLase and a company that finances the Waterlase systems for dentists who can’t afford it outright. We’d counter that having a preferred financing source is a common relationship throughout the equipment industry. Their third argument is that the company has to restate earnings for 2000, 2001, and 2002 because their auditors changed their mind on when revenues should be recognized. This was part of the whole corporate governance fad, and the company simply adapted to the auditors’ recommendation.

"Buy BLTI under $15 for a $21 target after they announce earnings in July. And for those who want to take on a bit more risk and have money set aside that they can afford to lose, I’d recommend the BioLase Technology September 15 Calls. The July options series expires before earnings will be reported, so we have to go out to September. As always with options, use limit orders and check quotes carefully to be sure the options price you are seeing is from the same time frame as the stock price."

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