3 Health Stocks that Look Pretty

Alex is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Sales growth in the beauty, personal care, and aesthetic treatment market in the United States doubled the average consumer spending rate growth in 2011 and in 2012. This year will probably not be an exception. In today's image-driven society, people are willing to spend significant amounts of money to look their best. And it's not just women - men are also jumping on the bandwagon, and so are foreign costumers, especially in the emerging markets. The following three companies provide popular aesthetic treatments, and could be well-poised to benefit from the growth in the sector.

Allergan (NYSE: AGN): Perhaps best known as the developer of Botox, Allergan is a multi-specialty health company focused on developing and commercializing specialty pharmaceuticals and medical devices.

With regards to valuation, Allergan currently trades at a P/E of 30.57, which does not signal that the stock is undervalued. However, forward P/E is slightly more attractive, at 20.12. PEG is a bit high at 2.37. These ratios indicate that the market believes that Allergan can grow significantly in the next few years, and that it's willing to pay a bit more for the stock than current earnings could justify. This seems to be the case in all the three stocks, as they all have above-average P/E ratios.

Analysts are moderately bullish on the stock; it has an average recommendation of 1.80 (buy/overweight) and an average price target of $114.85, which implies that the stock has an almost 5% upside potential from current price levels. The two most recent analyst reports (both in February) seem to echo the trend: Canaccord Genuity raised its price target to $111, and rated the stock a 'hold,' while Stifel Nicholaus rated it a 'buy,' and gave it a $118 price target.

In fact Allergan has had positive momentum since 2009 (it's stock price is up 165%), and continues to perform well this year (up 19.32% YTD). The stock is 34.8% above its 52-wk low of $81.15, and just 2% off its all-time high of $111.84. The company also pays a minuscule dividend of $0.20/share, which works out to a yield of 0.18%. Allergan has paid a dividend to its shareholders since 1989. However, the current dividend yield is one of the lowest historically.

Future prospects are good for the company: Botox and other cosmetic and therapeutic products are expected to be huge revenue generators (the company states that sales of these products will rise 10% in 2013). However, Allergan is also growing beyond the cosmetic base. With the purchase of MAP Pharmaceuticals, and its star product Levadex, a migraine treatment, the company will make important inroads into more traditional pharmaceutic sectors. The earnings report last month showed that Allergan is growing at a healthy rate (EPS is up 15%), and has good momentum (the stock continued to rise despite the fact that earnings missed analyst estimates). It is also favorably viewed by analysts, and it even pays a small dividend. It is hardly a value stock, but it might be a good stock to consider if one wants to bet on the growth of the aesthetic treatment industry.

Align Technology (NASDAQ: ALGN): The company designs, manufactures, and markets the Invisalign system, a method for treating malocclusion (accounting for 94% of the company's revenues), as well as scanners and CAD/CAM services (accounting for the remaining 6%).

Align trades at a P/E of 46.89, which is higher than the group's average. Forward P/E is slightly more attractive, at 22.80. As with Allergan, the market seems to believe that Align will experience good growth and is therefore willing to pay such a premium to current earnings.

Analysts are bullish on the stock: It has an average recommendation of 1.70 (buy/overweight), and an average target price of $36.83, which implies that the stock could go up 10.63% from current prices. In February, analysts at Stifel Nicholaus rated the stock a 'buy' and gave it a $38 price target. Also in February, Zacks upgraded Align to neutral, and gave it a $33 price target.

With regards to price moevemtns, the stock is 16.40% off its 52-wk high of $39.82, and 42% above its low of $23.45. As with Allergan, the stock has had a good run since 2009, and has gained about 20% YTD. Unlike Allergan, the company pays no dividend to its shareholders, and has never done so.

In January, Align reported earnings of $0.27/share, beating analyst estimates. Revenue was up almost 11%, and estimates are bullish. The key to profitability is that, in today's society, Align Tech has been able to develop and market a product that not only corrects malocclusion, but it does so invisibly. As a result, Align's client base has grown rapidly, especially among the teenage population, and is now expanding into Europe and Asia, which could boost its clients and therefore the company's revenues. Even though the valuations are high, the stock has good momentum, good growth prospects, and bullish analysts, so investors should consider it if investing in the sector.

Cynosure, Inc. (NASDAQ: CYNO): The company develops and markets aesthetic treatment systems that are used by physicians and other practitioners to perform non-invasive and minimally invasive procedures to remove hair, treat vascular and pigmented lesions, rejuvenate the skin, liquefy and remove unwanted fat through laser lypolysis and reduce the appearance of cellulite.

With regards to valuation, Cynosure has a P/E of 38.27, higher than the group's average. Forward P/E is also high, albeit less so, at 25.73.

Analysts are also bullish on this stock.  It has an average recommendation of just 1.30 (buy), and an average price target of $36.75, which implies that the stock price could go up more than 20%. However, it should be noted that the analyst reports from which these averages are calculated are a bit dated (the most recent being from Oct. 2012), so take this information with a grain of salt.

The stock is currently at its 52-wk high, and is almost 77% above its 52-wk low of $16.88. Even though it has has a good run since early last year, the stock is still far from its 2007 peak of $43.50. Year-to-date, the stock has gained almost 24%, and there is no denying it has had excellent momentum these last months. As with the case of Align, the company pays no dividend, and has never done so.

Cynosure's strength lies on the ability to deliver a number of treatments in one single laser platform. The demand for their products should keep increasing, as they cover hair removal, cellulite reduction, anti-aging, pigmentation, body-sculpting, and treatments for vascular lesions. They have also recently launched a new product, PicoSure, which can remove tattoos in a simple yet effective way. Q4 earnings were strong, beating analyst estimates (both in revenue and in EPS), increasing margins, and reporting a 25% growth in sales. Again, investors are willing to pay a premium for growth, as seen in the stock high valuation ratios, but as long as the company continues to deliver good results and growth, there is no reason the stock's price should decline.

<table> <tbody> <tr> <td> </td> <td><strong>P/E</strong></td> <td><strong>Fwd P/E</strong></td> <td><strong>PEG</strong></td> <td><strong>Avg PT (% implied upside)</strong></td> <td><strong>Mean Rec.</strong></td> <td><strong>Div Yield</strong></td> </tr> <tr> <td><strong>AGN</strong></td> <td>30.57</td> <td>20.12</td> <td>2.37</td> <td>$114.85 (+4.93%)</td> <td>1.80</td> <td>0.18%</td> </tr> <tr> <td><strong>ALGN</strong></td> <td>46.89</td> <td>22.80</td> <td>2.34</td> <td>$36.83 (+10.63%)</td> <td>1.70</td> <td>N/A</td> </tr> <tr> <td><strong>CYNO</strong></td> <td>38.27</td> <td>25.73</td> <td>-</td> <td>$36.75 (+23.12%)</td> <td>1.30</td> <td>N/A</td> </tr> <tr> <td><em>Edge</em></td> <td><em>AGN</em></td> <td><em>AGN</em></td> <td><em>ALGN</em></td> <td><em>CYNO</em></td> <td><em>CYNO</em></td> <td><em>AGN</em></td> </tr> </tbody> </table>

Bottom Line

All three companies are profitable and growth-driven. Their stocks are loved by investors and analysts, and their momentum is undeniable. However, as is the case with other growth stocks with high valuations, if a company reports a weak quarter, the stock price could suffer. At any rate, the three companies are in growing businesses, have attractive products, and will probably have a good 2013. After all, with a recovering economy consumers have more money, and many will spend part of it in reducing their wrinkles, aligning their teeth, or removing their spots.


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