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FOR INVESTORS: A STOCK THAT COULD RIDE THE AGE WAVEChances are ESC Medical Systems' cosmetic surgery lasers will see plenty of actionNothing like a powerful demographic trend to get the heart of a stock investor pumping faster. Imagine, for instance, being privy to knowledge that cigar-smoking would come back into vogue in the mid-90s. You could have lined your shelves with cigar stocks and made a fortune in the past couple of years. The demographic tidal wave known as the baby boom, though, is somewhat trickier to profit from. Everyone knows that the boomers are nearing retirement age, but picking a stock that'll benefit from that isn't as easy as downing some Viagra. Indeed, health care is an obvious industry to begin with, but which sector? Pharmaceuticals are at very high valuations right now. Hospitals and HMOs are in a cash crunch currently that's depressing profits. Plenty of medical device companies have intriguing technology, but for them to profit from the swelling ranks of seniors, they have to get a stingy Medicare program to pay premium prices. But one medical devices company appears to be in a prime position for the aging of America (and the rest of the world for that matter) because, ironically, its machines are not covered by Medicare. ESC Medical Systems (ESCMF) manufactures a broad array of lasers, mostly for cosmetic procedures such as hair removal, skin rejuvenation, and vericose vein removal. The lasers are usually bought by individual doctors, mostly dermatologists, who use them to supplement their normal practice. Since patients have to pay cash for these procedures, the doctors can reap much higher margins than they could if Medicare or insurers were reimbursing them. ESC, which is now the world's largest medical laser manufacturer, should make more than $300 million in revenues in 1998, and analysts expect that number to grow drastically in the years to come. 'OUT OF THE OPERATING ROOM.' The growth will be coming from a series of new lasers for new procedures that the company hopes to introduce as soon as the Food & Drug Administration approves them. One laser will be sold to ear, nose, and throat specialists to perform a common ear-draining procedure in children that previously required anesthesia and a hospital stay. Another will be sold to gynecologists to perform a procedure for reducing excessive menstrual flow, a malady that afflicts 60% of women over 40. ESC will even be introducing a laser dental drill that it thinks will be the first to be used on both the gums and teeth (previous dental lasers have been approved only for gum work and have had disappointing results). "Anytime we can take a procedure out of the operating room and put it in a doctor's office, we will be able to sell a lot of lasers," says CEO Dr. Shimon Eckhouse. Meanwhile, ESC's core market of aesthetic products continues to show rapid growth. CIBC Oppenheimer analyst John Calcagnini predicts that the hair-removal market in the U.S. alone will double to $185 million in 1998, and ESC owns 50% of that market. No other competitor has more than a double-digit share. ESC has a sales staff of more than 120 who have already nearly saturated the dermatology community and will now be focusing on other specialists, including those in the dental market. The company also has a stronghold in Europe, which accounted for 48% of first-quarter sales, and it has just begun its assault on Asian, where hair removal and cosmetic surgery are widely accepted practices. Like most technology-intensive medical device manufacturers, ESC's profit margins are high, ranging from 25% to 30%. Last year, it racked up $41 million in profits on $192 million in sales. In the first quarter, it blew away analysts' estimates when it reported earnings of 46 cents per share, more than a dime above consensus expectations. Meanwhile, ESC boasts of no long-term debt, and it carries $150 million in cash. 'MISUNDERSTOOD'? So why is this company so cheap right now? Its price-to-expected-earnings ratio for 1998 is about 17, which isn't too far from being half of the p-e on the S&P 500. It currently sells for $34.88, almost 24% off its all-time high of $46 in October, 1997. "I've been struggling with why this stock isn't doing better for a long time," says Kurt Von Emster, manager of Franklin Global Health Care II fund (FKGHX), which has owned the stock for more than a year. "It should be worth a lot more than it is now." For one thing, Wall Street wasn't pleased when ESC announced that it was going to acquire rival Laser Industries in November of last year. "It was a very misunderstood deal," says Steven Halper, an analyst with Donaldson, Lufkin & Jenrette, who points out that Laser's biggest product is in the hair-removal market. "There's just an institutional distaste for the concept of hair removal. But we live in a society where there are a lot of vain people, and it's a real business, and it's growing." Halper also dismisses fears that the company is introducing too many product lines. "On the contrary," he says. "It's the diversity in products that makes me feel more comfortable with the stock." ESC's next moment of truth will come on July 22, when it announces second-quarter earnings. Analysts look for it to make 47 cents per share. If the company exceeds expectations again, it could be the beginning of a long ride on the age wave for ESC. Sam Jaffe writes about the markets for Business Week Online
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Updated July 9, 1998 by bwwebmaster
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