CUTR - Cutera: Staying Away For Now (Rating Downgrade)

2023-07-11 09:33:16 ET

Summary

• The Cutera share price has more than halved in the past four months due to key management changes and the absence of management guidance for FY 2023.
• The near-term outlook for Cutera is still very uncertain, which indicates that Cutera's stock warrants a meaningful valuation discount.
• I lower my rating for Cutera to a Sell; I am staying away from the stock until there is greater visibility regarding the company's future strategy with new management.

Elevator Pitch

My rating for Cutera, Inc. ( CUTR ) shares is a Sell. I previously published an initiation article for CUTR on March 7, 2023 discussing the "positives and negatives" associated with the company's business.

I have decided to change my investment rating for CUTR from a Hold previously to a Sell now with this current update. I think that Cutera's recent stock price underperformance is justified, as there is a lack of visibility for the company in terms of the new management team's plans and potential staff churn.

Share Price Underperformance

CUTR's stock price has dropped by -54.7% since my prior March 7, 2023 write-up as per Seeking Alpha price data. During this same time frame, the S&P 500 (SP500) rose by +10.6%. Cutera's shares have underperformed significantly on both an absolute and a relative basis in the last four months.

Cutera's consensus forward next twelve months' Enterprise Value-to-Revenue valuation multiple contracted from 3.05 times as of January 3, 2023 to 1.64 times (source: S&P Capital IQ ) at the end of the July 10, 2023 trading day. It is noteworthy that CUTR's current Enterprise Value-to-Revenue metric is just slightly above its 52-week trough Enterprise Value-to-Revenue ratio of 1.60 times.

The changes to CUTR's management team and the lack of financial guidance are the key factors which have led to Cutera's share price decline and valuation de-rating.

Earlier on April 12, 2023, Cutera disclosed the "immediate terminations of Daniel Plants as Executive Chairman and David Mowry as CEO" by the Board as a result of "joint and unanimous recommendations from a special committee." Sheila Hopkins was appointed as CUTR's interim CEO at that point in time, and a permanent CEO has yet to be appointed at the time of writing.

At the company's Q1 2023 earnings briefing in May, CUTR noted that it is "not providing financial guidance at this time." In my view, Cutera didn't offer guidance because of its below-expectations first quarter results and the difficulty of forecasting the performance of AviClear. I had cited the management's reference to AviClear as "the first and original FDA cleared laser treatment for mild to severe acne" in my March 2023 initiation article.

The company's revenue decreased by -5.2% to $55 million in Q1 2023, which turned out to be -8% below the Wall Street analysts' consensus topline estimate of $59.8 million . Cutera's net loss per share also widened from -$0.40 in Q4 2022 and -$0.84 in Q1 2022 to -$1.26 for Q1 2023, and this was far worse than the market's consensus bottom line projection of -$0.62. Cutera emphasized at its first quarter results call that "suboptimal leadership direction that led to execution issues" were responsible for the company's poor Q1 2023 performance. 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 relating to "execution."

Separately, CUTR also acknowledged that the company's most recent quarterly earnings call that it is still in the process of trying to "fine-tune and verify all of those assumptions on AviClear," considering that this is "a new compelling technology." Given that it is tough to estimate or predict the sales and margins of this new product and key growth driver (AviClear) with a reasonable amount of certainty, this is also likely to have discouraged CUTR from issuing new financial guidance.

Murky Outlook

Looking ahead, the outlook for Cutera remains murky.

In the prior section, I mentioned that Cutera is looking for a new CEO. In fact, the company is also searching for a new CFO. CUTR revealed in its Q1 2023 results release that former CFO Rohan Seth had left the company, with Stuart Drummond being appointed as CFO on an interim basis.

It will be reasonable to assume that it will be some time before CUTR formulates a new strategy following the appointment of a new CEO and a new CEO on a permanent basis in time to come. In the meantime, Cutera might still be affected by "execution issues" that it mentioned at its first quarter results briefing.

Also, there is still a risk of other employees departing from the company in the medium term. Cutera highlighted at its Q1 2023 earnings call that it has "committed up to $13 million" for "an 18-month period" staff retention program. Of the $13 million, around $10 million is specifically allocated to sales personnel.

At the company's first quarter earnings briefing, one of the attendees raised the issue of "potential executive defections" considering that "a dozen key employees (previously) signed a letter saying they didn't want to see a change in leadership." In response, Cutera stressed that employee "morale is actually quite good" now. Nevertheless, one can't rule out the possibility of CUTR either facing staff departures or having to extend the employee retention plan, when the staff retention program ends in one and a half year's time.

Closing Thoughts

In my view, it is appropriate to stay away from Cutera, Inc. shares for now, taking into account the uncertainty surrounding the company's future, so a Sell rating for CUTR is fair. When the new management team for CUTR is officially appointed and a new corporate strategy is presented to shareholders, that will be the time to reconsider a potential investment in Cutera, Inc.

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