CUTR - Cutera: Consider Both Financial Outlook And New CEO Appointment (Rating Upgrade)

2023-09-19 10:55:02 ET

Summary

• Cutera's FY 2023 revenue guidance suggests that the company's top line is expected to contract on both a YoY and HoH (Half-on-Half) basis in the second half of this year.
• On the flip side, a new CEO was appointed in August, and his recent share purchases represent a vote of confidence in the company's future.
• I revise my rating for Cutera to a Hold, in view of both the recent new CEO appointment and the company's poor financial prospects.

Elevator Pitch

I upgrade my rating for Cutera, Inc. ( CUTR ) stock from a Sell previously to a Hold. The recent new CEO appointment and insider buys have prompted me to raise my investment rating for CUTR. But Cutera isn't a Buy yet, as the company's short-term financial prospects remain challenging.

2H 2023 Financial Prospects Are Poor

I previously downgraded my rating for CUTR to a Sell with my July 11, 2023 update on the basis that "the near-term outlook for Cutera is still very uncertain." I was proven to be right, as Cutera's stock price dropped by -41.7% (source: Seeking Alpha price data) following the publication of my prior write-up in July.

CUTR's below-expectations quarterly financial performance and full-year guidance were the main reasons for the company's weak stock price performance in recent months. Cutera's shares fell by -22.5% on the next trading day (August 9, 2023) after the company's Q2 2023 financial results were released.

Revenue for Cutera declined by -4.7% YoY to $61.2 million in the second quarter of this year, and this was -5.7% below the Wall Street analysts' consensus top line projection of $64.9 million. To make things worse, CUTR's normalized net loss per share widened from -$1.26 in Q1 2023 to -$1.59 for Q2 2023, which was worse than the market's consensus bottom line estimate of -$0.85 per share.

Looking forward, the mid-point of Cutera's FY 2023 revenue guidance at $225 million was -14.8% lower than the market's expectations of $264 million . This also implies that the company expects its top line to decrease by -6.4% HoH (Half-on-Half) and -16.4% YoY in the second half of this year.

At the company's Q2 2023 results call , Cutera highlighted that "there are macro pressures facing our customers that are not getting easier, and we need some time to resolve our service challenges." Service challenges for CUTR refer to a decline in "service levels" driven by "parts availability issues" as per the company's management commentary at the recent quarterly earnings briefing. CUTR also stressed that these broader market (macroeconomic) and company-specific (service issues) headwinds will have a greater impact on the company in 2H 2023 as compared to 1H 2023.

It is reasonable to assume that positive surprises relating to Cutera's financial performance are unlikely to happen in the near term.

New Appointments And Insider Buys

Earlier, I cautioned in my July 2023 article that "given that CUTR has yet to appoint a new permanent CEO, it is uncertain how long it will take for Cutera to deal with its challenges."

It is encouraging to know that Cutera has made some key appointments in recent months. Taylor Harris became Cutera's new CEO starting on August 7 , while Jeff Jones was appointed as the company's COO on August 28 .

Taylor Harris comes with relevant industry experience and he has been on CUTR's board for some time prior to his appointment as CEO. Taylor Harris has previously been the CFO at healthcare companies such as MyoKardia, ZELTIQ Aesthetics, and Thoratec Corporation. He became one of the company's board directors in June this year. The company's COO, Jeff Jones also has the necessary experience for his new appointment, having served in "senior operational leadership roles at medical device companies" in the past as highlighted in CUTR's August 24, 2023 press release .

Taylor Harris, the new CEO of Cutera, stressed at the company's Q2 earnings call that "the challenges" for CUTR "are execution issues", and emphasized that the management team is "going to start working on it right now."

Actions speak louder than words, and Taylor Harris expressed his confidence in Cutera by spending close to $300,000 on the purchase of 30,000 CUTR shares on August 29, 2023. On the same day, the company's CFO, Stuart Drummond, also acquired 5,000 shares in Cutera. The market was clearly impressed by the insider buys, as Cutera's share price rose by +13.8% on August 30.

Share Price And Valuations

Cutera's current stock price and valuation metrics are pretty attractive.

CUTR's shares last traded at $8.57 at the end of the September 18, 2023 trading day. On August 29, 2023, the company's CEO and CFO bought CUTR shares at average prices of $9.91 and $9.80 , respectively which are higher than what the stock is currently trading at.

The market currently values Cutera at 1.66 times (source: S&P Capital IQ ) consensus forward next twelve months' Enterprise Value-to-Revenue, which is substantially lower than the stock's five-year average Enterprise Value-to-Revenue multiple of 2.39 times. Also, CUTR's current Enterprise Value-to-Revenue ratio appears to be depressed, taking into account the company's reasonably strong consensus FY 2024-2027 top line CAGR estimate of +20.1% as per S&P Capital IQ data.

But there is a lack of results-related catalysts to push up the company's share price, as Cutera's 2H 2023 financial outlook is weak as indicated in an earlier section of this article.

Concluding Thoughts

I have a positive view of Cutera's new CEO and COO appointments, and insider buys by the CEO and CFO recently. I also think that CUTR's valuations are undemanding. But CUTR's 2H 2023 outlook is unfavorable, which implies that there is an absence of visible catalysts to re-rate Cutera's shares in the very near term. As such, I am of the opinion that a Hold rating for CUTR is fair.

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