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From a new article...

March 5, 2007
by Jeff Fischer

Medical device maker, Syneron Medical (ELOS), announced last week a key 10-year, exclusive marketing partnership with giant consumer products firm Procter & Gamble (PG).

Syneron designs and manufactures surgical lasers for cosmetic uses, including wrinkle reduction, hair removal, cellulite and -- launching this year -- dental. All are big-ticket items sold to doctor offices. But Syneron is now developing cosmetic products for the home consumer market, which is where P&G comes in: Procter & Gamble has agreed to market and distribute Syneron's consumer products. The initial focus is on wrinkle reduction, age spots and similar skin issues: a potentially very large audience.

Syneron is coming off of a 2006 that was heavy on investment in sales and marketing, knocking operating margins down from 44% in 2005 to 30%. Sales grew 34% for the year, though, to $117 million, with gross margins down just two points to a still-strong 85%. With greater operating expenses, net income was flat. This isn't horrible given the giant increase in spending, especially if net income can hold steady and before long grow again despite heavier marketing costs. Because the stock is already very reasonably -- attractively -- priced, it means that any bottom-line growth the next few years should reward investors. Let's take a look.

Syneron Medical (ELOS) $26
.............................Full Year 2006...........YOY Growth.........EV/FCF Multiple
True Free Cash Flow(TFCF)....$28.35 million....(7%)........19.3x
Structural Free Cash Flow(SFCF)...$39.62 million....Flat........13.7x
Cash, investments....$172 million.....+19.4%...Cash per share: $6.23

[True free cash flow is cash from operations minus capital expenditures minus tax benefits from stock options. Structural free cash flow (what Warren Buffett calls "owner's earnings") is net income from operations plus depreciation and amortization minus capital expenditures. These are two key ways to measure the health and growth -- or lack of it -- at a business. Both can show realities that mere earnings per share often miss.]

The $26 stock trades at 19 times true free cash flow (TFCF) and less than 14 times structural free cash flow (SFCF). The company expects at least 20% sales growth this year; if free cash flow can begin to grow again the next two years, following flat results last year, then we'll have a stock that's likely going to appreciate in-kind.

In relation to marketing costs, P&G will absorb much of those for the new consumer products, so although price points on these sales will be much lower than the large machines for doctor offices, margins for Syneron should remain strong -- in other words, the products will definitely add to profits.

Add in that the company right now has $172 million in cash and equivalents (more than $6 per share), and that's up 19% last year despite flat net income (and no debt), and also last year's share count was down slightly to 27.6 million -- and all in all, you have a stage set for what should be at least a few strong years of growth as new products launch and (presumably) marketing costs level.

Taking a look at the P/E (the worth of which we always question: only FCF is the truest way to measure a firm's worth), the shares trade at 18 times trailing results, and less than 13 times forward estimates.

But it's Free Cash Flow that Counts
Investors gain insight and confidence on their investments by applying metrics and analysis that not everyone has ready access to. At Complete Growth Investor, we calculate various measures of free cash flow on all of the stocks that we recommend for CGI Members (and then buy ourselves), running true free cash flow (TFCF), structural free cash flow (SFCF) and -- where appropriate -- maintenance structural free cash flow (MSFCF).

Free cash flow is that important to confident and successful investing, and to the long-term success of a business. Syneron generates strong free cash flow and trades at attractive multiples to it, offering investors the potential for healthy rewards against managed risk.

Invest well!

* We also recently looked at free cash flow at Google (GOOG) and free cash flow at (AMZN). We'll look at eBay (EBAY) soon.

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