PALOMAR MEDICAL TECHNOLOGIES, INC.
REVIEW
RECENT PRICE: $3 7/8 PMTI-Nasdaq Small Cap
Palomar recently announced that they have reached an agreement with Laserscope (LSCP) to license their technology. PMTI may be able to license their technology to others who may be infringing or close to infringing on their patents. The Company has fared miserably in making their own products. They sell them to a distributor below cost and then pay them a 30% commission. Management seems to take care of all their friends but never the owners (shareholders). The Company recently settled a lawsuit against two of its senior managers and therefore the decks are clear. One of them, the CFO, remains. Gee whiz, if I ever cost my Company $5 million, I wouldn’t expect to be around, but this is not the case in this organization. Its seems no amount of money is too much for his services. His only attribute seems to be to lose money and dilute the shareholders. Under his tenure the number of shares went from 6 million to over 70 million prior to the reverse split of last year.
Last month PMTI announced that it set up a subsidiary in California to develop products from its technology. This bodes well in that the people in California are probably competent. The Star subsidiary which the Company sold last year was a very good manufacturer. They were able to produce quality products. The hope is that the Company will shut down its operations in Massachusetts and let the Company operate out of California with the CEO of the operation taking over for the incompetent and expensive management in Massachusetts.
On a proforma basis, we calculate that PMTI would earn $4-5 million over the next twelve months (40-50 cents per share) if they simply shut down the Massachusetts operation. They have no shortage of loss carry forwards and therefore would not have to pay any taxes.
This whole situation bodes well for a buyout. A
company in the same business could buy
PMTI for $10-12 and be paying about 20-25X pre-tax earnings net of cash,
with the patents and royalty streams arising from their deals with Coherent
(COHR) and LSCP. Insiders own less than
1% of the Company although they have lavished themselves with options. This is
a method of controlling stock without paying for it. These options which are
priced at $3 3/8 and up, may give them some incentive too
sell because, if nothing else, they seem to be interested in making money for
themselves. The Annual Meeting is coming up, and based on current Management’s
record on stock performance, someone may mount a challenge. To its credit,
Management has cut overhead significantly, but it is still bloated.
The hope is that Management has enough interest in
helping the shareholders to allow a smooth take over. This may not be the case,
but with only 1% of the stock, they may succumb. The CEO, who took over in
1998, said that he would be leaving after a year, which he hasn’t done, but he
is in his 70’s and he may have “one clear moment” and decide to go out by selling the Company. Stranger things have
happened. If that is the case, the Shareholders may finally benefit, especially
if it is a stock deal with a Company that has competent management. The
cosmetic laser business is booming, and the future is very bright owing to
vanity on the part of Baby Boomers.
The fact remains that the Company is much more
valuable than the current price would indicate, owing to the perception of poor
management and the fear that the Company will start printing more stock. This
value may soon be released in the form of a take over. It is a question of how
much more the shareholders can take. The Company currently has about $2.50 per
share in cash.
Thomas O’Brien owns 85 shares of PMTI’s stock. Affiliates of Mr. O’Brien own about 12% of the common stock, however, Mr. O’Brien has no control over this stock position. Mr. O’Brien was part of a group of stockholders who sought to replace the Board of Directors of PMTI last year. He is no longer part of that stockholder group. He has received no compensation for this analysis. This is not an offer to buy or sell any security. It is not a complete analysis of any industry or company. It is for informational purposes only.