SURGing Towards The Black

In the never-ending push to find “the next big thing,” or capitalize on volatile, short-lived momentum movers, market participants often miss out on bread-and-butter issues that hold out the potential for slow, steady and relatively risk-free gains. Shares of medical device maker Synergetics, USA, Inc. (SURG) may offer just such an opportunity right now, as the company’s bottom-line performance and outlook suggest that it is very much headed in the right direction.

Synergetics USA, Inc., provides precision surgical devices primarily for the ophthalmology and neurosurgery markets in the United States and internationally. The company’s product lines include precision-engineered disposable and reusable devices, surgical equipment, procedural kits, and the delivery of various energy modalities, including laser energy, ultrasonic energy, radio frequency energy for electro surgery and lesion generation, and visible light energy for illumination. The company sells its products directly, as well as through distributors and independent sales representatives to end-users at hospitals, ambulatory surgery centers, and surgeon offices.

The first thing to note about Synergetics is that it is a profitable enterprise, reporting EPS of $0.06 for its most recent Q4 reporting period. That number was down year-over-year from Q4 2012 when the company banked EPS of $0.08. Revenue for the period, however, weighed it at $17.86 million, up almost 6% year-over year, and well above the average analyst revenue expectation of $17.01 million. The company has turned a profit in three out of its last four quarters, with the most recent Q4 sales figure the biggest of the last four reporting periods.

A small part of the revenue increase was related to the company’s June purchase of M.I.S.S. Ophthalmics Limited—a private ophthalmology distribution company incorporated in England and Wales, for $2.8 million. M.I.S.S. was Synergetics’ distributor of ophthalmic products in the U.K., and its wholesale distribution activities contributed approximately $1.1 million in revenue to the company in fiscal 2012. M.I.S.S. generated total revenue of approximately $3.2 million during their fiscal year ended March 31, 2013 and was solidly profitable on an operating basis.

Commenting on the company’s Q4 results, President and CEO David Hable said, “We were pleased with our fourth quarter revenue performance, particularly in the U.S., where we saw improving trends in our ophthalmic sales of both new and base business products. Commercialization of the VersaVIT™ system remains on-track as we continue to establish a solid installed base. Fourth quarter results also benefitted from strong demand from our OEM partners.” On a down note, he also stated that international results fell short of expectations. Despite those sales numbers, however, overall revenue generation was healthy and trending up.

In another positive development, Synergetics’ performance garnered the attention of analysts at Wunderlich, who elevated their rating of SURG shares to Buy from Hold over the summer. The firm also raised its price target to $5.80 from $5.50 a share. In addition to the M.I.S.S. acquisition, the brokerage house cited the company’s sales growth as another reason for the upgrade. Fiscal Q3 sales of $16.3 million had jumped 11.6% year-over-year and 15.7% on a sequential basis. That growth came with increased sales across all of the company’s product lines, and earnings per share weighed in at $0.05. Analysts had anticipated EPS of $0.03 on sales of $14.8 million.

From an investment standpoint, another compelling aspect of Synergetics is that the company has a highly diversified product line, offering approximately 650 catalogue items in the vitreoretinal surgical market, including vitrectomy system under the VersaVIT brand; procedural packs under the VersaPACK and Core Essentials brands; fiberoptic endoilluminators and endolaser probes; various disposable and reusable devices designed for intraocular manipulation of tissues; illumination equipment under the Photon brand; laser equipment under the Ellex’s Solitaire, Quantel’s Supra, and Vitra brands; Volk’s line of ophthalmic lenses; Labtician’s line of scleral buckles, and many others. This diversity provides a nice cushion should the sales of one or more products take an unexpected hit—indicated by Synergetics’ Q4 revenue beat despite the overseas sales miss.

Chartwise, SURG’s technical trading picture is shaping up nicely as well. After treading water in the low $3 range prior to June’s earnings release, buyers bid up SURG shares 25% for a $4 test.

SURG Chart

As is so often the case after a big price run up, SURG pulled back and briefly found a consolidative home in the $3.60 – $3.80 channel, then made the leap to the $3.80 – $4.00 band.

With the M.I.S.S. acquisition and the Wunderlich upgrade in tow, SURG surged all the up to $4.40, but selling once again knocked the price back down to $4.00 – $4.10.

That all changed, however, after the early October earnings release, when shares ripped all the way to $5, pulling back to find support back at around $4.40. Since that time, as you can see, SURG has been slowly stair stepping its way to higher highs.

This stock may never be a bullet mover or one-day wonder, but it appears as if patient investors with a longer-term time frame should be be able to realize some steady and reliable profits from SURG. Nice periods of consolidation like the SURG chart shows is usually healthy for a stock’s price, the company is executing on the revenue front, and its membership in a relatively defensive sector should protect against any radical price drops lower. As long as Synergetics continues to deliver on the sales and earnings front, investing in SURG shares may prove to be a solid way to add some balance and stability to any portfolio.

Warren Gates
Senior Analyst
Normandy Research

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