By Yaser Anwar, CSC of Equity Investment Ideas

PMTI (a small-cap stock, 724 mill) engages in the research, development, manufacture, and distribution of laser and light based systems for medical and cosmetic treatments.

Why this sector?

According to CIBC World Markets, the cosmetic laser market is valued at about $1 billion worldwide, and sales grew 15% in 2006 over the previous year. While hair removal remains the top use of cosmetic lasers, with growing numbers of non-core markets acquiring them — hospitals, family practitioners, OB/GYNs, and even spas and beauty salons — additional uses will continue to climb in importance.

7 Catalysts That Make PMTI A Buy:

1) P&G Partnership (cosmetic lasers): Palomar will complete certain development activities in consultation with Gillette during an 11th month program, scheduled to end by January 13, 08. Gillette will provide PMTI with development payments of approximately 1.5 mill upon the completion of certain deliverables.

2) Royalties & Lawsuits:

Alma

, charged for infringing on PMTI’s patents, will pay a 9.5% royalty to Palomar for sales of its products going back to 2003, and an 8.5% royalty on sales from now through the end of 2007. That fee will drop to 7.5% for future sales, beginning next year. PMTI has been aggressive in getting the industry to pay royalties- the ones that are already doing so are: CYNO, IRIX & CUTR, now Alma.

3) CUTR’s problems. In the 1st week of April, CUTR reported that it would miss the 1st Q revenue and earnings projections that it had given at the end of January. With CUTR’s sales declining, pin-action was also seen in PMTI, but in my opinion PMTI has a lot more to count on such as royalties, its higher cash/flow per share and weakness in CUTR is good for PMTI.

4) Short Ratio: has a high short-ratio with 22% of its float, 17 million, short and has a short ratio of 6% or 3.9million, 18 million outstanding shares. PMTI trades about 500K+ daily.

5) Financial Comparison:

a) % R&D/Revenue: The industry incurs lots of R&D expense, so its important to see the revenue they derive of it. PMTI has 11% R&D/Revenues vs. 5% CUTR vs. 6.8% ELOS vs. 5% CYNO.

b) Cash/Share & Debt: PMTI has 5$ & no debt vs. CYNO’s 5$ but some debt (t/d= 0.2) vs. ELOS 3.7 and no debt vs. ELOS 8 and no debt. While PMTI has lower cash/share than ELOS, its important to consider the % of R&D/Revenue here as its a cutthroat R&D-type of industry.

c) Growth: The medical equip. industry have seen steady growth but PMTI has done even better than most of its peers as far as top-line growth is concerned, PMTI’s revenues and EPS have grown very rapidly over the past 3 years vs. competitors. 5-year forecast: PMTI 29% vs. CUTR 28% vs. ELOS 18% vs. CYNO 29%.

d) Profitability: PMTI’s profit margins are 41% vs. CUTR 2% vs. CYNO -0.8% vs. ELOS 34%. ROE: PMTI’s 55% vs. CYNO -0.7% vs. CUTR 2% vs. ELOS 23%.

e) Valuation: PMTI trades at a discount vs. the industry. According to the TSCM ratings tool, PMTI trades at 15x vs. Industry’s 32x vs. ELOS’s 18x (CYNO & CUTR’s multiples weren’t available on Y! F and TSCM). Also, out of the 4 I’ve been comparing PMTI with, only PMTI is rated as a buy by TSCM’s ratings tool.

6) Analysts:

PMTI doesn’t have any meaningful coverage, except on April 10th Matrix research upgraded it, citing ‘Growing demand for light-based treatments of cosmetic and medical conditions is driving impressive EVA fundamental trends. We expect PMTI’s sales and EVA fundamental trends to continue to grow as the company develops more over-the-counter cosmetic devices’.

Its good to ride cottails of Matrix because Barron’s Magazine ranked Matrix USA’s Focus List performance first among the recommended stock lists of 13 leading national and regional brokerage firms with the top returns for both the last half of 2006 and the full year ended December 31, 2006.

Besides, PMTI is back to where it was before the upgrade.

7) Technicals (chart):

a) PMTI has put in a double bottom and there is positive, upward divergence happening in the MACD. The stock is also exhibiting a head and shoulders formation, with the right shoulder under construction at the moment.

b) From a support/resistance perspective, it needs to find support at 38, the double bottom area, and needs to breach the 42 area with meaningful volume.

In conclusion, even though PMTI is a small-cap stock, I seldom see both the fundamentals and technicals signaling a buy. The analysts have yet to catch up on the fact that PMTI has enough cash/share to invest in R&D and make meaningful acquisitions, also the royalties and partnerships will give PMTI a more stable revenuebase.

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