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No. of Recommendations: 8
Pretty nice looking. The 03-04 decline in defensive profits is due to a more than doubling in shares outstanding due to the IPO (note enterprising still went up, however!). I had to make some 2005 estimates since the 20-f won't be filed for a few more weeks, but there're really minor things like advertising expense and operating leases.

http://www.wrightmgt.com/ELOS_IETC.pdf

Cameron
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No. of Recommendations: 1
Cam:

What is going on with ELOS? That IETC analysis is beautiful. I have been following them since you brought them to my attention late last year and I even made some money selling $30 puts on it. Remember when this was at $30. Thank goodness I did not sell LEAPS or longer dated puts.

Net Cash is just over $5 per share and increasing! The extended payment terms are of some concern, but with Net Cash increasing some of those fears are lessened. When I wrote the puts, I thought ELOS was attractve at about $28 per share and it seems it should be a screaming buy now. It seems that Wall Street is punishing ELOS for some reason. Is it because ELOS can't return value to shareholders by paying dividends or buying back stock without losing their preferential tax status in Israel?

Does anyone have any thoughts to explain Wall Street's disdain for ELOS?

Regards,
Emmette
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No. of Recommendations: 8
Emmette,

I can't explain the disdain. I bought my first bunch at over $40 (just a small amount to get in the game), and then more at $32, and then more just this week as my June puts were executed early. I think my average cost is around $28.

The Russell 2000 fell by 14% from May 10th to June 13th, so I think the sell off in small caps has hurt ELOS. Not being able to buy back stock is a problem. Well, not really a problem, but if they could buy back stock it would provide some votes in the near term voting machine. The company has a high short interest (so it gets red flagged on Hewitt's 5 minute drill), and I think the stock can definitely be artificially depressed by shorts. It is volatile and any buying interest seems to send the stock up quickly.

3 of the largest holders dumped the stock this year, which is part of it going down. If you believe in technicals, then there was no support between $25 and $20, so when it broke the $25 level...

And there's always concern over competition. Management turn over didn't help the recent price either. I think the moat is smaller than none if that's possible. They have patents, but there's nothing stopping anyone from coming out with a better or different way of firming skin/wrinkles/veins/hair. And with PMTI suing CUTR, I think that spooked some investors (although ELOS uses different technology [ie, energy and light], my research shows the laser component uses the same wavelength and pulse duration that's covered under PMTI's patents, so they'd have to prove to a court that using energy as well as the laser is not covered under PMTI's patents [of course PMTI's patents only cover hair removal, not wrinkles or cellulite etc].)

And missing 2 quarters in a row of revenue estimates certainly doesn't help. However, the CIBC analyst who reiterated his buy yesterday has a history of good channel checks (he called the Q4 miss before Q4 was over), so I view that as a good sign for the current quarter. And I think if they can prove that their investment in sales will pay off, the stock will be right back to $30. We may not see $40 again for a long time, but I don't think $30 is that far off.

My model shows that the current price, with a 12% discount rate, is estimating 5% sales growth, additional investment in working capital (receivables) of $2M more than the previous year (ie last year was $8m, this year $10M more, next year $12, etc), and expenses as a % of sales higher than the most recent quarter (which was higher than the street was expecting). I think that's just overly pessimistic. I conservatively get about $37 a share in value, I can get over $50 if receivables quit growing so fast and I can get $55 if they gain some leverage from selling expenses. My sales growth rates are, starting from the $115M in 2006 (management guidance, we might have to adjust down after Q2)

20% - 2007
18 - 2008
16
15
13
12
10
10
10
10
3% terminal

Using the expectations investing approach, I estimate only 2 years of 20% sales growth before 3% terminal growth justifies the current price (assuming massive working capital needs). It's only 1 year if I assume normal working capital needs.

So yes, I think it's a strong buy right now. It's currently about 10% of my portfolio, or I'd be adding more. I couldn't pull the trigger when it was below $18 earlier in the week, however I expect I'll be selling some more puts along the way.

Cameron
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No. of Recommendations: 0
Cameron:

Thanks for your detailed reply. I am sorry I can only give it one rec.

Once my brokerage account transfer is complete I might consider puts on this one again. The volatility you speak of makes put premiums juicy and the drop from the high $20s to the high teens/low $20s has stripped out a chunk of risk from ELOS.

Regards,
Emmette

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