Monday, December 16, 2002 9:39:19 AM
CEOcast Volume 61
Was it a pullback, or the end of a bear-market rally? That question is at the forefront of investors’ minds after the three indices turned in disappointing results this week. The Dow declined 211 points, or 2.5% and is down 15.8% for the year. The Nasdaq relinquished 60 points, or 4.2% as it is off 30.1% on the year and the S&P 500 lost 23 points, or 2.5% to stand 22.5% below the level it started the year. Rising global tensions cast a pall over the market.
Profit-taking was relatively orderly, as the week’s downward move came amid relatively light volume. The issue for investors is whether the recent pullback represents a buying opportunity, or whether it foreshadows the indices ultimately re-testing their October lows. This week should serve as a key test, as each of the past two years has seen the indices post solid gains during the final two weeks of the year, as favorable seasonal factors helped offset otherwise dismal results for the year. If there is any risk, it is likely to occur this week, as earnings warning season gets underway in earnest. Normally, few companies issue profit warnings during the Christmas season, as many executives are already on vacation. Analysts expect fourth-quarter earnings at companies in the Standard & Poor's 500 to rise 14.9 percent from the year-ago period. However, that is down from expectations of a 19.9 percent climb at the beginning of October.
Of course, the "wild card" is likely to be geo-political events. Increasing concerns about terrorism, the possibility of war with Iraq, heightened tensions with North Korea helped contribute to rising oil prices and a declining dollar this week. This seemed to roil the markets, which more than offset positive earnings news from Sprint (NYSE: FON), Amgen (NASDAQ: AMGN), and Procter & Gamble (NYSE: PG). What should investors expect this week? The earnings calendar is surprisingly busy, as retailers Circuit City (NYSE: CC) and Best Buy (NYSE: BBY) post results Tuesday morning before the market opens. After the close, Micron (NYSE: MU) releases results. Wednesday morning, Bear Stearns (NYSE: BSC), General Mills (NYSE: GIS) and FedEx (NYSE: FDX) post earnings. After the close, Oracle (NASDAQ: ORCL) and Bed, Bath & Beyond (NASDAQ: BBBY) announce earnings. Oracle is expected to earn $.08 for the quarter according to analysts. Thursday morning, the brokers will take the spotlight, as Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MWD) and Lehamn Brothers (NYSE: LEH) release results. After the close, contract manufacturers Jabil Circuit (NYSE: JBL) and Solectron (NYSE: SLR) announce quarterly results.
While we mentioned earlier that earnings warnings could contribute to volatility, Friday is triple witching day, marking the expiration of options and futures. As if this was not enough, the Nasdaq 100 Index will be rebalanced on Friday. Watch for companies such as Dentsply International (NASDAQ: XRAY) to get a boost if it is added to the Index. As if this were not enough, the S&P 500 Index is also rebalanced at this time, and Friday could also be the day that the Index makes its own changes. This is likely to cause additional volatility, as fund managers required to mimic the performance of the indices are required to buy the stocks of those companies added and sell the stocks of those companies removed. Celera Genomics (NYSE: CRA) holds an investor meeting on Monday in a calendar otherwise devoid of scheduled corporate events.
On the economic front, Tuesday’s release of the CPI is expected to show that inflation remains tame. Later that day, November housing starts are likely to show an improvement to 1.69 million homes on an annualized basis from the previous month. Also, November Industrial Production is expected to increase by 0.2% versus a decline of 0.8% during the prior month. Finally, November Leading Indicators are expected to increase to 0.6% from October’s unchanged levels. Fed Chairman Alan Greenspan provides a local economic outlook in his speech at the Economic Club of New York on Friday.
Approximately seven months ago we initiated coverage on Penn Octane (NASDAQ: POCC), the leading supplier of LPG, used in propane, to Northeast Mexico. We felt there were several reasons why the stock was likely to soar, and that the company had turned its operations around and was ready to rapidly grow revenues and earnings. Our editors were so confident in the company’s prospects that they purchased over $200,000 of stock in the open market. We believed that the company would be able to generate substantial cash flow and the company showed for the past two quarters solid and steady earnings improvement. This week, the company reported breakout first quarter earnings for the period ended October 31 and the stock responded with its strongest gains of the year. The company exceeded its own guidance by three cents, earning $1.2 million, or 8 cents per share. Penn Octane delivered 49.6 million gallons of LPG, up 10.4% versus last year, to its largest customer, a subsidiary of Pemex. How dramatic has the company’s turnaround been? Last year, it lost 10 cents during its first quarter. Penn Octane has now earned 46 cents per share for its previous 12 months, meaning that it still trades at just 7 times trailing 12-month earnings.
The company, which is now entering the two strongest quarters of its year, expects to more than double last year’s second quarter earnings of 5 cents, as it announced it expects EPS of between 10 and 13 cents. There is even more upside potential for investors as Mexico is expected to open its markets to foreign imports during the first half of next year. This would enable the Company to sell to customers beyond Pemex, and likely cause a dramatic increase in earnings. We believe the company is capable of earning 65-70 cents per share this year, even without a change in the Mexican market. The stock ended the week at $3.30, up an eye-catching 42% this week.
eResearchTechnology (NASDAQ: ERES), a leading e-research technology and services provider, and the subject of a Special Situations newsletter two weeks ago, continues to increase in price. The company’s stock advanced for the fourth consecutive week, helped by the announcement that another major pharmaceutical company had selected its technology to accelerate their clinical development program. ERES’s technology continues to penetrate new markets and major pharmaceutical companies (it has 10 of the top 15 pharmaceutical companies as clients) and we believe that the stock will be significantly higher than current levels before year-end. Because the short-interest in the stock is so high (53% of the float when the numbers were last reported), we feel that any major news announcement could be a catalyst for a substantial move higher. The stock ended the week at $15.05, up 71 cents.
Last week we initiated coverage on Health Sciences Group, Inc. (OTCBB: HESG), a provider of innovative products and services in the nutraceutical, pharmaceutical, and cosmeceutical industries. This week, the company announced its most significant acquisition to date, as it signed a definitive agreement to acquire privately-held Quality Botanical Ingredients, Inc. (QBI). The acquisition dramatically changes the prospects of the company and enables it to rapidly scale revenues, as QBI, a leading purchaser, manufacturer and contract processor of bulk botanical materials and nutritional ingredients supplied to buyers in the pharmaceutical, nutraceutical and cosmetic industries, generates $15 million annually in revenue. QBI has a strong reputation in the functional food and beverage industry, and the synergies from the deal should be significant. Energy bars and sports drinks appear to be much more than a fad, and with the industry growing so rapidly, the combination of QBI’s products with HESG’s resources and ability to make further acquisitions should be the recipe to scale revenues and earnings rapidly. HESG is now expected to generate over $20 million in revenue this year, impressive for a company with a market capitalization of approximately $7 million. The stock ended the week at $0.78.
One of our favorite investment ideas this year has been gold. Not only have all of our selections soared in value, but we believed that the recent consolidation in price created yet another buying opportunity. Now, that appears to be materializing, The metal's spot price Friday morning reached $336 an ounce, the highest since Oct. 5, 1999, when the price briefly touched $339 after central banks in Europe and the U.S. agreed to limit their auctions of the metal. This positions junior mining companies such as Golden Eagle International (OTCBB: MYNG) to capitalize on a run-up in gold prices. The company, through its gold recovery plant at Cangalli, Bolivia recently began production, and has rapidly increased both the capacity and production at its plant. The company is now processing at least 2,000 tons per day at its plant, in an area that is known to have produced over 32 million ounces of gold in its history. The stock, like the price of gold, has recently consolidated around the $0.25 level, giving it a valuation of approximately $60 million, but we feel that it is now poised to break-out to new highs. It ended the week at $0.26.
Another promising junior mining company that has lined investors’ pockets with profits this year has been Silverado Gold Mines Ltd. (OTCBB: SLGLF), a junior mining company with a promising mine in Alaska. Savvy investors who bought this stock at the beginning of the year have seen their profits increase 570%. Many investors have sent us e-mails asking whether they should "chase" the stock higher, or whether there was still room for the price to increase further. The good news is that the recent pull-back in the price (hit a new 52-week intra-day high of $0.76 on December 6) provides an excellent entry point. The stock ended the week at $0.68, down 2 cents as a result of profit-taking and we believe that with the recent increase in the price of gold that the stock is likely to establish a new 52-week high this week. The stock is up 66% since we began coverage.
Could chocolate actually lower your cholesterol? Forbes Medi-Tech (NASDAQ: FMTI), a biopharmaceutical company focused in the cardiovascular area, published extremely positive results in the British Journal of Nutrition. The study of 70 participants with mild hypercholesterolemia found that the company’s phytosterol-enriched chocolate reduced their LDL cholesterol by 10.3%. Participants consumed three 10-gram servings of the phytosterol ( Reducol)-enriched chocolate a day that provided 1.8 grams of unesterified phytosterols. The implications of these results could be substantial, as high cholesterol is a problem affecting millions of people. Forbes is now waiting for a response from regulatory authorities in the U.S., European Union and Canada regarding a health claim supporting the health benefits of phytosterols related to cholesterol. If the company is able to successfully utilize this data in marketing Reducol, it could be a catalyst for a major increase in revenues. It ended the week at $0.40.
Orphan Medical (NASDAQ: ORPH), the maker of treatments for uncommon diseases, announced this week that it had received notification that the Committee for Orphan Medicinal Products had recommended Orphan Designation in Europe for Xyrem® (sodium oxybate) oral solution for the treatment of narcolepsy. The designation is significant, as it provides a 10-year period of market exclusivity in the European Community once a medication is approved for marketing. If this designation is endorsed by the Evaluation of Medicinal Products, which is expected to occur within 45 days, it should significantly increase the likelihood that the company will find a major European marketing partner. The company launched the product in the U.S. through its own specialty sales force in October. The stock ended the week at $9.00, up slightly from the time we initiated coverage.
Cepheid (NASDAQ: CPHD), a leading manufacturer of genetic assessment systems, announced Friday that the Northrop Grumman Corporation-led team had received a contract award from the U.S. Postal Service to expand and continue testing of the Bio-Agent Detection System. Cepheid is part of the consortium. Under the pre-production contract, systems will be installed and tested at 14 USPS facilities. This will enable the postal service to validate performance of the final Bio-Agent Detection System, which incorporates Cepheid's GeneXpert® modules as its detection and identification system and utilizes Cepheid's test cartridges. Ultimately, the System could be utilized at postal service facilities throughout the country. The stock ended the week down 19 cents at $5.84, as investors took profits on the news. The stock is up 48% since we began coverage two months ago.
Investors who like the energy sector have already reaped profits from Contango Oil & Gas Company (AMEX:MCF), an independent natural gas and oil exploration company. Since we started coverage four weeks ago the stock has moved from $3.00 to $3.25. Contango is expert in using hedging as a method of protecting its gains. Last week, the company announced it had purchased $4.00 per MMBtu natural gas puts covering 10 MMBtu per day for the period of January 2003 through December 2003 at a cost of $0.29 per MMBtu. In addition, the Company entered into a natural gas swap agreement covering 8 MMBtu per day at $4.62 per MMBtu for the period of January 2003 through March 2003. The puts will provide a floor against declines in natural gas prices on almost two-thirds of estimated year 2003 production. The swaps guarantee a $4.62 per MMBtu on approximately 45% of first quarter 2003 production. The company also withdrew the possible sale of its South Texas Exploration Program producing properties. Does this mean that Contango sees energy costs soaring and needs this production to meet demand or does it believe that the value of this property will reach historically higher levels? We believe that Contango’s sophistication offers great upside for investors with minimal downside as we continue to see energy prices rising.
Tri-Valley Corporation (OTCBB: TRIL), a California-based junior exploration and production company, has intrigued us since we began coverage of the company in July when the stock was $1.25. Its stated objective is to explore for high-impact oil and gas prospects through its Opus I Drilling Fund. The stock had been up handily this year, until the company announced this week that it would abandon activities at its Aurora prospect in California. In fact, the company lost 23% of its value on the news. We think this presents an extraordinary opportunity for those investors looking for oil and gas investments, as the sell-off shows the confusion that the investment community has about the company. Aurora’s 18-million barrel target represents less than 1% of the aggregate targets estimated in the company’s inventory and cost to drill the dry hole represents less than 1% of the Opus drilling budget. Put another way, the company has 26 drilling prospects in its fund. It abandoned Aurora, one of its smallest, after spending a nominal amount of money to drill it (likely under $100,000) and lost nearly $8 million in market capitalization on the news. The company continues working on the completion of its Sunrise-Mayel No. 2H natural gas well near Delano, California. The stock ended the week at $1.31, down 46 cents.
CareDecision Corp. (OTCBB: CDED), an e-health technology developer and medical PDA innovator, announced this week that it had signed an agreement with Netcare Health Group to acquire its wholly owned subsidiary, Netcare Health Services, Inc. The agreement is significant, as it gives the company immediate access to Netcare's 800 existing physicians that will be an excellent base for the deployment of its MD@Rx™ PDA device. The transaction will also result in an investment by Netcare in CDED and annual revenues of $5 million. The stock was up 20% this week, and we believe that this news could be the catalyst for the stock to substantially increase from current levels.
BIO-key International (OTCBB: BKYI), an emerging biometric company, continues to see growing interest in its advanced fingerprint identification algorithms. This week SAFLINK® Corporation, a marketer of biometric security solutions, announced that it would include BIO-key's "one-to-many" fingerprint matching algorithm in its product line and will work with the company to jointly offer custom integration solutions for enterprises that require highly specialized one-to-many fingerprint identification capabilities. The company has already formed relationship with Intel and Oracle among others. The stock ended the week at $0.61, up approximately 60% since we began coverage.
Flight Safety Technologies (OTCBB: FLST), an innovator in the development of advanced technologies aimed at enhancing aviation safety and efficiency, announced this week that former U.S. Senator Larry Pressler had joined its Board of Directors. Pressler served for 18 years in the Senate where he was Chairman of the Commerce, Science and Transportation Committee and Chairman of the Aviation subcommittee. Ressler’s relationships should help the company further expand the applications for its highly-promising SOCRATES technology, which monitors "wake vortex turbulence" at airports. The company has already been working with the FAA and NASA, among others. The stock ended the week at $1.80, up 12.5% since we began coverage, less than 2 months ago.
Ballistic Recovery Systems (OTCBB: BRSI) announced this week record results for its fiscal year ended September 30. The company, which designs, manufactures and markets unique and proprietary ballistic parachute systems that lower aircraft to the ground in the event of an in-flight emergency, posted sales of $5 million, up 34% from the year earlier period, and earnings of $604,000, or $.10 per share. The company has principally relied on revenues from Cirrus Design, its largest customer to date, but is now pursuing agreements with other aircraft builders. The company has been able to significantly grow revenues despite a sharp downturn in business aircraft sales, and if it is successful in penetrating new manufacturers, it could substantially increase its revenues. The stock ended the week at $1.00.
According to the NIDA (National Institute of Drug Abuse), the cost of drug and alcohol abuse is in excess of $160 billion dollars. Of this amount, $110 billion account for lost productivity. PHC (OTCBB: PIHC) is a national health company that we have mentioned in previous newsletters. The company specializes in helping the gaming and transportation sector deal with this huge problem. We examined the clientele of PIHC and discovered that many of their relationships were more than 10 years old. Included were such companies as Union Pacific Railroad , CSX , Canadian Pacific , Boyd Gaming , PacifiCare, MGM and Station Casinos. As we have mentioned previously, PIHC for the first time, has put together eight consecutive quarters of profitability. Its second quarter ended December 31 is usually breakeven. We believe there is a high probability that the profitability streak will continue and on a comparative basis, the current quarter will beat that of the prior year significantly. The stock closed Friday at $0.70 and we reiterate our views on accumulating for the long-term, particularly since the company is expanding into smoking cessation programs, and will now be increasing its consumer market as well.
Global Business Services Inc. (OTCBB: GBSS), a company that owns and franchises retail postal and business services centers, announced this week that it had reached an agreement with a franchisee for the Portland, Oregon and surrounding areas for its Postal Connections postal centers. The company now has 44 locations in 12 states and has already opened up eight new locations in the current quarter. The stock ended the week at $0.33.
SPECIAL SITUATIONS:
SCP Pool Corporation (NASDAQ: POOL) $30.77
Many investors will recall that the debate around eResearchTechnology (NASDAQ: ERES) centers around its ability to sustain current growth rates. The stock has a heavy short-position as naysayers believe that it will not meet its growth estimates. A similar scenario has occurred with SCP Pool Corporation, the world's largest distributor of swimming pool supplies and related products. The company has parlayed its rapid growth rate into sales of $824.2 million for the first nine months of the year, an increase of $101.6 million, or 14% versus 2001. The company also reported EPS for the first nine months of $1.73 per diluted share on net income of $44.7 million, up 18% compared to $1.46 per diluted share on net income of $39.3 million in the comparable 2001 period.
The company has a significant short position, with approximately 32% of the float pledged to shortsellers. We believe that this group believes that the company’s stock will decline as a result of a drop-off in sales of new swimming pools. This reasoning fails to understand the nature of the swimming pool industry, where most of the sales come from the maintenance and repair of existing pools, rather than new sales. This creates a recurring revenue model, and makes SCP less likely to be impacted by an economic downturn. The company’s dominant position in the sector enables it to maintain superior margins to its smaller competitors.
SCP has generated impressive organic growth, as well as completed 20 acquisitions during the past eight years. These acquired companies further benefit from SCP’s buying power and systems. The pool industry has grown at a 4-5% annual rate for years, but SCP has been growing at a faster rate through acquisitions and by selling complimentary products that its customers have typically been buying from other distributors. The company also opens 5 to 10 new locations annually. As a result, SCP has grown at twice the industry’s rate. The company believes that this strategy will allow it to grow operating income at a 12 to 15 percent rate. The company has also pursued international opportunities, through an acquisition in France, the second largest market outside the U.S. for pools. Since its acquisition, it has also opened up additional offices there.
The company has remarkably been able to expand the distribution of more than 63,000 national brand and private label products to over 34,000 customers through 199 service centers in North America and Europe without cannibalizing existing operations. In fact, same-store sales grew 10% for the first nine months of the year, suggesting that there is plenty of room for additional growth. The company recently acquired Fort Wayne Pools in August. The deal contributed $14.3 million in revenue to its third quarter results. We expect that the company will earn between $1.95 to $2.00 per share next year.
Shareholders have been rewarded as the company continues its strong performance. Barring a late sell-off, the stock will post its seventh consecutive yearly increase in price, a claim that few companies can make in this environment. The stock is up 12.1% this year, and is up 358% since 1999. These gains have attracted a large contingent of short-sellers. However, if the company meets its guidance and our estimates for next year, it would trade for just 16 times 2003 estimated earnings, an inexpensive multiple for a company growing operating results at a 15% clip. It currently trades for less than 20 times trailing 12-month results. We find the current valuation attractive, and believe that companies such as SCP Pool, that have delivered strong earnings and share price appreciation in both strong and weak economic markets deserve to trade at premium valuations. Based upon its current valuation of approximately $770 million, we believe that the company is likely to turn in yet another year of price appreciation for investors in 2003.
SVI Solutions Inc. (AMEX: SVI) $0.62
Since the holiday season is the critical time of the year for retailers, when stocks in the sector often rise, we thought now was the ideal time to begin coverage of SVI Solutions, a leading global provider of multi-channel application software technology and services for the retail industry. Inventory management is a critical part of success for retailers. In fact, Wal-mart’s inventory-tracking systems are often hailed as an integral part of the retailer’s success. SVI’s applications are designed to reduce the effort required to develop, test and maintain mission critical retail information software. Its Island Pacific division offers a complete suite of software applications to provide retailers with the ability to efficiently, effectively and profitably manage their corporate merchandising business processes. Island Pacific also provides direct to consumer e-commerce applications that support mail order, catalog and Internet channel retailing as retailers increasingly embrace multi-channel marketing.
The company, founded in 1988, has over 1,200 customers, including a "Who’s Who" of major retailers such as Home Depot, OfficeMax, The Limited, JCPenney, The Disney Stores, Victoria's Secret, and Toys "R" Us, among others. The company continues to pursue a strategy to become the leading global supplier of enterprise software solutions for the retail industry and a prominent developer of cutting-edge PC training courseware and testing tools. Through both organic growth and acquisition, the company has developed a comprehensive suite of industry-leading end-to-end solutions and has become more than a single source for retailers. Through acquisition, it has expanded beyond North America to Asia-Pacific and Europe. The company now has a variety of products to cross-sell to multiple customer bases, significantly increasing revenue potential.
SVI's solutions help to reduce operational costs at a time when leading retailers have come under unprecedented pressure due to a sluggish economy. Its solutions range from front-end Store Systems to back-office Merchandise Management Systems, as well as e-commerce and Customer Relationship Marketing applications. The recent evolution from a brick-and-mortar industry into a multi-channel environment with consumer access points ranging from stores and catalogs to web sites and kiosks has created the need for retailers to manage the full spectrum of transactions emerging from this new environment.
The company’s stock, which traded as high as $14.88 in November, 1999 started its decline after its founder Barry Schechter decided to step back from day-to-day operations by appointing new management in January, 2001, a decision that led to horrendous results for the company. SVI posted revenues for the first nine months of its fiscal year ended December 31, 2000 of $26.7 million. Since then, the company has posted declining sales and losses. For the first six months of its fiscal year ended September 30, 2002, the company reported net sales of $9.5 million, down from $15.5 million the year earlier. It also lost $4.3 million or $(0.15) per share, compared to a net loss of $7.1 million or $(0.19) per share recorded for year earlier time frame. Most importantly, Mr. Schechter has returned to spearhead the company’s operations as its CEO. The company decreased its operating loss by reducing costs and improving its balance sheet.
The company’s stock has traded in a relatively narrow range, although it is currently down 32% for the year. This gives the company a market capitalization of approximately $18 million, which means that the company trades at less than one times revenues. By contrast, JDA Software Group (NASDAQ: JDAS), which generated revenues of $166 million for the first nine months of its fiscal year, trades at approximately 1.5 times estimated 2002 revenues, despite issuing several severe profit warnings this year. JDAS’s stock has lost more than half of its value this year. We think that based upon current valuation, the return of the company’s founder and the company’s guidance that it will achieve significant second-half revenue growth and profitability by the end of its fiscal year makes the risk/reward equation quite attractive at current valuations.
PCTEL, Inc. (NASDAQ: PCTI) $7.04
There have not been many communications companies that have successfully maintained revenues and earnings in the current environment. However, PCTEL, a leading provider of innovative and cost-effective Internet access solutions is an exception. Its products include analog soft modems, DSP-based modems and WLAN software products that simplify installation, roaming, Internet access and billing. The company’s customers include Dell Computer, Toshiba, Sharp, Panasonic, Texas Instruments and Hewlett Packard, among others.
The company has been able to diversify its customer base this year, despite the challenges in the sector. Last year, 47% of its revenues came from one customer, creating significant risks for investors. This year, 82% of its revenues to date have come from six customers. It recently completed its first 802.11 software sale and has three additional contracts in place, creating a potentially lucrative new market for the company. Perhaps the best example of the turnaround that has occurred in its business can be seen in its third quarter results, where revenues increased to $12.5 million from $4.7 million in the quarter ended September 30, 2001. The company was able to achieve this despite employing 22% fewer people than last year. For the first nine months of its fiscal year, the company generated revenue of $32.4 million, down just 3% from the year earlier period. The company has earned $3.5 million for the first nine months of its year, a substantial improvement from a loss of $52.1 million during the 2001 period.
The company’s performance is even more impressive when it is compared with its competitors. Its gross margin of 60.2% is the highest in the industry, far exceeding competitors such as Conexant (44.8%), BroadCom (44.2%) and Agere Systems (14.3%). All three companies currently post substantial losses, while PCTEL is profitable. The company has achieved this result because it was able to execute its transition to the wireless market seamlessly. It has also been able to grow its modem business significantly. It realized that in order for it to stay in the commodity modem business that it would have to reduce costs dramatically, and it has done so. Its Segue™ solution has created a significant growth opportunity in the emerging area of 802.11 technology. The company’s strong patent portfolio should also give rise to significant licensing opportunities.
The company’s third quarter results substantially exceeded analysts’ estimates, as it earned 16 cents per share, much better than estimates for a 7 cent loss. The company has a strong balance sheet, with over $112 million in cash and cash equivalents. This gives the company an enterprise value of less than $30 million, when its cash position is subtracted from its market capitalization of approximately $141million. Other companies such as Conexant carry valuations nearly triple that of PCTEL, despite a 29% decline in revenue and substantial losses. Despite its relatively strong performance, PCTEL’s stock has declined 27.6% this year, hardly good news for investors. However, when compared with Conexant (down 88%), Broadcom (down 60%) and Agere Systems (down 77%), it has significantly outperformed its peers. Despite this, all three of these companies still trade for valuations that substantially exceed their cash positions.
We believe that PCTEL, which has rallied 58% since its mid-October low, provides investors with an attractive way to participate in the communications equipment sector. Since this area is likely to be the beneficiary of an improving economy, PCTEL, which has significantly outperformed its peers from both an operating performance and stock perspective, appears to be the best way to play this sector. We think that a combination of a recovering economy as well as the company’s continued improvement in operating results reflecting its transition to wireless makes this company an attractive investment candidate at current levels.
Cymat Corp. (TSX: CYM) $1.15
The current economic environment has been brutal for small companies, as a challenging economy and a lack of funding has made it difficult for these companies to execute their business models. This is why when a company with nominal revenues is able to raise $5 million ($8.35 million Canadian) we take notice. Cymat, a materials technology company that has exclusive worldwide rights for producing Stabilized Aluminum Foam, completed this capital raise last month. The company uses a process that combines alloyed aluminum with a metal matrix composite to create strong lightweight panels and shapes. The benefits of the technology include a high strength-to-weight ratio, mechanical energy absorption, recyclability and low cost of production.
How is the technology employed? It is used in a broad array of industries, including automotive, architectural and design, rail, defense, marine, truck and oil and gas. The company has principally focused on the automotive industry, where there is the potential for over 150 pounds of its Cymat SmartMetal™ material per vehicle. It already has developed significant relationships with OEM’s such as Valeo for Crash Boxes, Decoma for bumper systems and PSA Peugeot for Structural 3D casting. In total, it has agreements with 13 OEMs and forty Tier 1 companies, including DaimlerChrysler, General Motors, Fiat and Ford. The company has already completed testing with Valeo and has a targeted launch of the 2004 model year for its platform.
The company also has a development agreement with Decoma International, Inc. (NASDA: DECA), the world’s leading supplier of automotive exterior components and systems, to develop a new bumper system using Cymat’s proprietary technology. The bumper system will be designed to reduce the weight, provide for greater design freedom and improve the ability of vehicles to withstand crashes at varying speeds. The companies anticipate that full commercialization will occur by 2005. NASCAR also recently announced that it would use the company’s technology to improve driver safety. Such an agreement is likely to further increase the visibility of the company’s technology.
Cymat has also formed an agreement with PSA Peugeot Citroen, the second largest carmaker in Europe, to develop 3D aluminum foam casting targets to enhance the energy absorption of automotive structural components. PSA plans to incorporate Cymat’s technology to replace a sand core in a casting. The goal is to enhance the energy absorption of the component in a crash. However, the company’s technology goes beyond just automotive applications. It has focused on other areas as well, such as sound attenuation in mining, blast protection, road safety and clean rooms/security. One example is the relationship it has developed with Ceco Door Products. Under a three-year supply agreement, its aluminum foam panels will be used in positive pressure doors. It is working with Dynatec (TSX: DY), a leader in mining services, to develop accoustic dampening products.
Although the company’s revenues have been nominal to date, its Alusion division is expected to generate $1.5 to $3 million in revenues during the company’s fiscal 2003 year. Its near-term opportunities include wall cladding, furniture, shelving, fixtures and other design and architectural applications. It has already had installations in retail, entertainment complexes, condos and in the World Trade Center Memorial.
Despite the company’s stock losing 70% of its value this year, it recently completed a $5 million financing at a price of $1.25, slightly above where the company’s stock trades today. This values the company at approximately $53 million Canadian, on a fully-diluted basis. Many leading Canadian institutions participated in the transaction, suggesting that the company’s technology has significant potential. We agree, and believe that at the current level, upside returns for investors dwarf potential risks. We will have more on this promising company next week, after it announces its second quarter results for the period ended October 31, on October 18th.
Do you know of a company that deserves more coverage? Contact us at new@ceocast.com.
The CEOcast Newsletter is an electronic publication committed to providing our readers with factual information on selected publicly traded companies. All statements and expressions are the sole opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READERSHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING INANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIESA HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS NEWSLETTER IS PROTECTEDBY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCEDIN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF CEOcast. Moreover, as detailed below, this publication accepts compensation from certain of the companies that it features. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. This information has not been independently verified by CEOcast. The reader should use caution, as a result. The following companies, featured in this newsletter, have compensated CEOcast: Silverado Gold Mines, forty-thousand dollars and one hundred sixty thousand shares of stock for a five-month program, BIO-Key International, seventy-five hundred dollars per month, plus options to purchase two hundred thousand shares at forty-two cents, Cepheid, seven thousand five hundred dollars, Orphan Medical, seven thousand five hundred dollars, Golden Eagle International, six thousand dollars per month, plus fifty thousand shares of stock per month, eResearchTechnology, seven thousand five hundred dollars, plus warrants to purchase twelve thousand shares at thirteen forty, Tri-Valley Corporation, six thousand dollars per month, Health Science Corporation, eighty thousand dollars for a two month program, Forbes Medi-Tech, seven thousand five hundred dollars, Penn Octane Corporation, six thousand dollars per month, twenty thousand shares of stock and warrants to purchase twenty thousand shares of stock at three dollars fifty five cents (our editors own sixty-four thousand shares as well), CareDecision, eight hundred thousand shares of stock from a third party, Flight Safety Technologies, seven thousand five hundred dollars, Ballistic Recovery Systems, seven thousand five hundred dollars, Contango Oil and Gas, seven thousand five hundred dollars, PHC, seven thousand five hundred dollars, Global Business Services, seven thousand five hundred dollars, SCP Pool, seven thousand five hundred dollars, SVI, Inc. twenty-two thousand five hundred dollars and fifty thousand shares of stock for a three-month program, PCTEL, seven thousand five hundred dollars and Cymat, seven thousand five hundred dollars.
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Was it a pullback, or the end of a bear-market rally? That question is at the forefront of investors’ minds after the three indices turned in disappointing results this week. The Dow declined 211 points, or 2.5% and is down 15.8% for the year. The Nasdaq relinquished 60 points, or 4.2% as it is off 30.1% on the year and the S&P 500 lost 23 points, or 2.5% to stand 22.5% below the level it started the year. Rising global tensions cast a pall over the market.
Profit-taking was relatively orderly, as the week’s downward move came amid relatively light volume. The issue for investors is whether the recent pullback represents a buying opportunity, or whether it foreshadows the indices ultimately re-testing their October lows. This week should serve as a key test, as each of the past two years has seen the indices post solid gains during the final two weeks of the year, as favorable seasonal factors helped offset otherwise dismal results for the year. If there is any risk, it is likely to occur this week, as earnings warning season gets underway in earnest. Normally, few companies issue profit warnings during the Christmas season, as many executives are already on vacation. Analysts expect fourth-quarter earnings at companies in the Standard & Poor's 500 to rise 14.9 percent from the year-ago period. However, that is down from expectations of a 19.9 percent climb at the beginning of October.
Of course, the "wild card" is likely to be geo-political events. Increasing concerns about terrorism, the possibility of war with Iraq, heightened tensions with North Korea helped contribute to rising oil prices and a declining dollar this week. This seemed to roil the markets, which more than offset positive earnings news from Sprint (NYSE: FON), Amgen (NASDAQ: AMGN), and Procter & Gamble (NYSE: PG). What should investors expect this week? The earnings calendar is surprisingly busy, as retailers Circuit City (NYSE: CC) and Best Buy (NYSE: BBY) post results Tuesday morning before the market opens. After the close, Micron (NYSE: MU) releases results. Wednesday morning, Bear Stearns (NYSE: BSC), General Mills (NYSE: GIS) and FedEx (NYSE: FDX) post earnings. After the close, Oracle (NASDAQ: ORCL) and Bed, Bath & Beyond (NASDAQ: BBBY) announce earnings. Oracle is expected to earn $.08 for the quarter according to analysts. Thursday morning, the brokers will take the spotlight, as Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MWD) and Lehamn Brothers (NYSE: LEH) release results. After the close, contract manufacturers Jabil Circuit (NYSE: JBL) and Solectron (NYSE: SLR) announce quarterly results.
While we mentioned earlier that earnings warnings could contribute to volatility, Friday is triple witching day, marking the expiration of options and futures. As if this was not enough, the Nasdaq 100 Index will be rebalanced on Friday. Watch for companies such as Dentsply International (NASDAQ: XRAY) to get a boost if it is added to the Index. As if this were not enough, the S&P 500 Index is also rebalanced at this time, and Friday could also be the day that the Index makes its own changes. This is likely to cause additional volatility, as fund managers required to mimic the performance of the indices are required to buy the stocks of those companies added and sell the stocks of those companies removed. Celera Genomics (NYSE: CRA) holds an investor meeting on Monday in a calendar otherwise devoid of scheduled corporate events.
On the economic front, Tuesday’s release of the CPI is expected to show that inflation remains tame. Later that day, November housing starts are likely to show an improvement to 1.69 million homes on an annualized basis from the previous month. Also, November Industrial Production is expected to increase by 0.2% versus a decline of 0.8% during the prior month. Finally, November Leading Indicators are expected to increase to 0.6% from October’s unchanged levels. Fed Chairman Alan Greenspan provides a local economic outlook in his speech at the Economic Club of New York on Friday.
Approximately seven months ago we initiated coverage on Penn Octane (NASDAQ: POCC), the leading supplier of LPG, used in propane, to Northeast Mexico. We felt there were several reasons why the stock was likely to soar, and that the company had turned its operations around and was ready to rapidly grow revenues and earnings. Our editors were so confident in the company’s prospects that they purchased over $200,000 of stock in the open market. We believed that the company would be able to generate substantial cash flow and the company showed for the past two quarters solid and steady earnings improvement. This week, the company reported breakout first quarter earnings for the period ended October 31 and the stock responded with its strongest gains of the year. The company exceeded its own guidance by three cents, earning $1.2 million, or 8 cents per share. Penn Octane delivered 49.6 million gallons of LPG, up 10.4% versus last year, to its largest customer, a subsidiary of Pemex. How dramatic has the company’s turnaround been? Last year, it lost 10 cents during its first quarter. Penn Octane has now earned 46 cents per share for its previous 12 months, meaning that it still trades at just 7 times trailing 12-month earnings.
The company, which is now entering the two strongest quarters of its year, expects to more than double last year’s second quarter earnings of 5 cents, as it announced it expects EPS of between 10 and 13 cents. There is even more upside potential for investors as Mexico is expected to open its markets to foreign imports during the first half of next year. This would enable the Company to sell to customers beyond Pemex, and likely cause a dramatic increase in earnings. We believe the company is capable of earning 65-70 cents per share this year, even without a change in the Mexican market. The stock ended the week at $3.30, up an eye-catching 42% this week.
eResearchTechnology (NASDAQ: ERES), a leading e-research technology and services provider, and the subject of a Special Situations newsletter two weeks ago, continues to increase in price. The company’s stock advanced for the fourth consecutive week, helped by the announcement that another major pharmaceutical company had selected its technology to accelerate their clinical development program. ERES’s technology continues to penetrate new markets and major pharmaceutical companies (it has 10 of the top 15 pharmaceutical companies as clients) and we believe that the stock will be significantly higher than current levels before year-end. Because the short-interest in the stock is so high (53% of the float when the numbers were last reported), we feel that any major news announcement could be a catalyst for a substantial move higher. The stock ended the week at $15.05, up 71 cents.
Last week we initiated coverage on Health Sciences Group, Inc. (OTCBB: HESG), a provider of innovative products and services in the nutraceutical, pharmaceutical, and cosmeceutical industries. This week, the company announced its most significant acquisition to date, as it signed a definitive agreement to acquire privately-held Quality Botanical Ingredients, Inc. (QBI). The acquisition dramatically changes the prospects of the company and enables it to rapidly scale revenues, as QBI, a leading purchaser, manufacturer and contract processor of bulk botanical materials and nutritional ingredients supplied to buyers in the pharmaceutical, nutraceutical and cosmetic industries, generates $15 million annually in revenue. QBI has a strong reputation in the functional food and beverage industry, and the synergies from the deal should be significant. Energy bars and sports drinks appear to be much more than a fad, and with the industry growing so rapidly, the combination of QBI’s products with HESG’s resources and ability to make further acquisitions should be the recipe to scale revenues and earnings rapidly. HESG is now expected to generate over $20 million in revenue this year, impressive for a company with a market capitalization of approximately $7 million. The stock ended the week at $0.78.
One of our favorite investment ideas this year has been gold. Not only have all of our selections soared in value, but we believed that the recent consolidation in price created yet another buying opportunity. Now, that appears to be materializing, The metal's spot price Friday morning reached $336 an ounce, the highest since Oct. 5, 1999, when the price briefly touched $339 after central banks in Europe and the U.S. agreed to limit their auctions of the metal. This positions junior mining companies such as Golden Eagle International (OTCBB: MYNG) to capitalize on a run-up in gold prices. The company, through its gold recovery plant at Cangalli, Bolivia recently began production, and has rapidly increased both the capacity and production at its plant. The company is now processing at least 2,000 tons per day at its plant, in an area that is known to have produced over 32 million ounces of gold in its history. The stock, like the price of gold, has recently consolidated around the $0.25 level, giving it a valuation of approximately $60 million, but we feel that it is now poised to break-out to new highs. It ended the week at $0.26.
Another promising junior mining company that has lined investors’ pockets with profits this year has been Silverado Gold Mines Ltd. (OTCBB: SLGLF), a junior mining company with a promising mine in Alaska. Savvy investors who bought this stock at the beginning of the year have seen their profits increase 570%. Many investors have sent us e-mails asking whether they should "chase" the stock higher, or whether there was still room for the price to increase further. The good news is that the recent pull-back in the price (hit a new 52-week intra-day high of $0.76 on December 6) provides an excellent entry point. The stock ended the week at $0.68, down 2 cents as a result of profit-taking and we believe that with the recent increase in the price of gold that the stock is likely to establish a new 52-week high this week. The stock is up 66% since we began coverage.
Could chocolate actually lower your cholesterol? Forbes Medi-Tech (NASDAQ: FMTI), a biopharmaceutical company focused in the cardiovascular area, published extremely positive results in the British Journal of Nutrition. The study of 70 participants with mild hypercholesterolemia found that the company’s phytosterol-enriched chocolate reduced their LDL cholesterol by 10.3%. Participants consumed three 10-gram servings of the phytosterol ( Reducol)-enriched chocolate a day that provided 1.8 grams of unesterified phytosterols. The implications of these results could be substantial, as high cholesterol is a problem affecting millions of people. Forbes is now waiting for a response from regulatory authorities in the U.S., European Union and Canada regarding a health claim supporting the health benefits of phytosterols related to cholesterol. If the company is able to successfully utilize this data in marketing Reducol, it could be a catalyst for a major increase in revenues. It ended the week at $0.40.
Orphan Medical (NASDAQ: ORPH), the maker of treatments for uncommon diseases, announced this week that it had received notification that the Committee for Orphan Medicinal Products had recommended Orphan Designation in Europe for Xyrem® (sodium oxybate) oral solution for the treatment of narcolepsy. The designation is significant, as it provides a 10-year period of market exclusivity in the European Community once a medication is approved for marketing. If this designation is endorsed by the Evaluation of Medicinal Products, which is expected to occur within 45 days, it should significantly increase the likelihood that the company will find a major European marketing partner. The company launched the product in the U.S. through its own specialty sales force in October. The stock ended the week at $9.00, up slightly from the time we initiated coverage.
Cepheid (NASDAQ: CPHD), a leading manufacturer of genetic assessment systems, announced Friday that the Northrop Grumman Corporation-led team had received a contract award from the U.S. Postal Service to expand and continue testing of the Bio-Agent Detection System. Cepheid is part of the consortium. Under the pre-production contract, systems will be installed and tested at 14 USPS facilities. This will enable the postal service to validate performance of the final Bio-Agent Detection System, which incorporates Cepheid's GeneXpert® modules as its detection and identification system and utilizes Cepheid's test cartridges. Ultimately, the System could be utilized at postal service facilities throughout the country. The stock ended the week down 19 cents at $5.84, as investors took profits on the news. The stock is up 48% since we began coverage two months ago.
Investors who like the energy sector have already reaped profits from Contango Oil & Gas Company (AMEX:MCF), an independent natural gas and oil exploration company. Since we started coverage four weeks ago the stock has moved from $3.00 to $3.25. Contango is expert in using hedging as a method of protecting its gains. Last week, the company announced it had purchased $4.00 per MMBtu natural gas puts covering 10 MMBtu per day for the period of January 2003 through December 2003 at a cost of $0.29 per MMBtu. In addition, the Company entered into a natural gas swap agreement covering 8 MMBtu per day at $4.62 per MMBtu for the period of January 2003 through March 2003. The puts will provide a floor against declines in natural gas prices on almost two-thirds of estimated year 2003 production. The swaps guarantee a $4.62 per MMBtu on approximately 45% of first quarter 2003 production. The company also withdrew the possible sale of its South Texas Exploration Program producing properties. Does this mean that Contango sees energy costs soaring and needs this production to meet demand or does it believe that the value of this property will reach historically higher levels? We believe that Contango’s sophistication offers great upside for investors with minimal downside as we continue to see energy prices rising.
Tri-Valley Corporation (OTCBB: TRIL), a California-based junior exploration and production company, has intrigued us since we began coverage of the company in July when the stock was $1.25. Its stated objective is to explore for high-impact oil and gas prospects through its Opus I Drilling Fund. The stock had been up handily this year, until the company announced this week that it would abandon activities at its Aurora prospect in California. In fact, the company lost 23% of its value on the news. We think this presents an extraordinary opportunity for those investors looking for oil and gas investments, as the sell-off shows the confusion that the investment community has about the company. Aurora’s 18-million barrel target represents less than 1% of the aggregate targets estimated in the company’s inventory and cost to drill the dry hole represents less than 1% of the Opus drilling budget. Put another way, the company has 26 drilling prospects in its fund. It abandoned Aurora, one of its smallest, after spending a nominal amount of money to drill it (likely under $100,000) and lost nearly $8 million in market capitalization on the news. The company continues working on the completion of its Sunrise-Mayel No. 2H natural gas well near Delano, California. The stock ended the week at $1.31, down 46 cents.
CareDecision Corp. (OTCBB: CDED), an e-health technology developer and medical PDA innovator, announced this week that it had signed an agreement with Netcare Health Group to acquire its wholly owned subsidiary, Netcare Health Services, Inc. The agreement is significant, as it gives the company immediate access to Netcare's 800 existing physicians that will be an excellent base for the deployment of its MD@Rx™ PDA device. The transaction will also result in an investment by Netcare in CDED and annual revenues of $5 million. The stock was up 20% this week, and we believe that this news could be the catalyst for the stock to substantially increase from current levels.
BIO-key International (OTCBB: BKYI), an emerging biometric company, continues to see growing interest in its advanced fingerprint identification algorithms. This week SAFLINK® Corporation, a marketer of biometric security solutions, announced that it would include BIO-key's "one-to-many" fingerprint matching algorithm in its product line and will work with the company to jointly offer custom integration solutions for enterprises that require highly specialized one-to-many fingerprint identification capabilities. The company has already formed relationship with Intel and Oracle among others. The stock ended the week at $0.61, up approximately 60% since we began coverage.
Flight Safety Technologies (OTCBB: FLST), an innovator in the development of advanced technologies aimed at enhancing aviation safety and efficiency, announced this week that former U.S. Senator Larry Pressler had joined its Board of Directors. Pressler served for 18 years in the Senate where he was Chairman of the Commerce, Science and Transportation Committee and Chairman of the Aviation subcommittee. Ressler’s relationships should help the company further expand the applications for its highly-promising SOCRATES technology, which monitors "wake vortex turbulence" at airports. The company has already been working with the FAA and NASA, among others. The stock ended the week at $1.80, up 12.5% since we began coverage, less than 2 months ago.
Ballistic Recovery Systems (OTCBB: BRSI) announced this week record results for its fiscal year ended September 30. The company, which designs, manufactures and markets unique and proprietary ballistic parachute systems that lower aircraft to the ground in the event of an in-flight emergency, posted sales of $5 million, up 34% from the year earlier period, and earnings of $604,000, or $.10 per share. The company has principally relied on revenues from Cirrus Design, its largest customer to date, but is now pursuing agreements with other aircraft builders. The company has been able to significantly grow revenues despite a sharp downturn in business aircraft sales, and if it is successful in penetrating new manufacturers, it could substantially increase its revenues. The stock ended the week at $1.00.
According to the NIDA (National Institute of Drug Abuse), the cost of drug and alcohol abuse is in excess of $160 billion dollars. Of this amount, $110 billion account for lost productivity. PHC (OTCBB: PIHC) is a national health company that we have mentioned in previous newsletters. The company specializes in helping the gaming and transportation sector deal with this huge problem. We examined the clientele of PIHC and discovered that many of their relationships were more than 10 years old. Included were such companies as Union Pacific Railroad , CSX , Canadian Pacific , Boyd Gaming , PacifiCare, MGM and Station Casinos. As we have mentioned previously, PIHC for the first time, has put together eight consecutive quarters of profitability. Its second quarter ended December 31 is usually breakeven. We believe there is a high probability that the profitability streak will continue and on a comparative basis, the current quarter will beat that of the prior year significantly. The stock closed Friday at $0.70 and we reiterate our views on accumulating for the long-term, particularly since the company is expanding into smoking cessation programs, and will now be increasing its consumer market as well.
Global Business Services Inc. (OTCBB: GBSS), a company that owns and franchises retail postal and business services centers, announced this week that it had reached an agreement with a franchisee for the Portland, Oregon and surrounding areas for its Postal Connections postal centers. The company now has 44 locations in 12 states and has already opened up eight new locations in the current quarter. The stock ended the week at $0.33.
SPECIAL SITUATIONS:
SCP Pool Corporation (NASDAQ: POOL) $30.77
Many investors will recall that the debate around eResearchTechnology (NASDAQ: ERES) centers around its ability to sustain current growth rates. The stock has a heavy short-position as naysayers believe that it will not meet its growth estimates. A similar scenario has occurred with SCP Pool Corporation, the world's largest distributor of swimming pool supplies and related products. The company has parlayed its rapid growth rate into sales of $824.2 million for the first nine months of the year, an increase of $101.6 million, or 14% versus 2001. The company also reported EPS for the first nine months of $1.73 per diluted share on net income of $44.7 million, up 18% compared to $1.46 per diluted share on net income of $39.3 million in the comparable 2001 period.
The company has a significant short position, with approximately 32% of the float pledged to shortsellers. We believe that this group believes that the company’s stock will decline as a result of a drop-off in sales of new swimming pools. This reasoning fails to understand the nature of the swimming pool industry, where most of the sales come from the maintenance and repair of existing pools, rather than new sales. This creates a recurring revenue model, and makes SCP less likely to be impacted by an economic downturn. The company’s dominant position in the sector enables it to maintain superior margins to its smaller competitors.
SCP has generated impressive organic growth, as well as completed 20 acquisitions during the past eight years. These acquired companies further benefit from SCP’s buying power and systems. The pool industry has grown at a 4-5% annual rate for years, but SCP has been growing at a faster rate through acquisitions and by selling complimentary products that its customers have typically been buying from other distributors. The company also opens 5 to 10 new locations annually. As a result, SCP has grown at twice the industry’s rate. The company believes that this strategy will allow it to grow operating income at a 12 to 15 percent rate. The company has also pursued international opportunities, through an acquisition in France, the second largest market outside the U.S. for pools. Since its acquisition, it has also opened up additional offices there.
The company has remarkably been able to expand the distribution of more than 63,000 national brand and private label products to over 34,000 customers through 199 service centers in North America and Europe without cannibalizing existing operations. In fact, same-store sales grew 10% for the first nine months of the year, suggesting that there is plenty of room for additional growth. The company recently acquired Fort Wayne Pools in August. The deal contributed $14.3 million in revenue to its third quarter results. We expect that the company will earn between $1.95 to $2.00 per share next year.
Shareholders have been rewarded as the company continues its strong performance. Barring a late sell-off, the stock will post its seventh consecutive yearly increase in price, a claim that few companies can make in this environment. The stock is up 12.1% this year, and is up 358% since 1999. These gains have attracted a large contingent of short-sellers. However, if the company meets its guidance and our estimates for next year, it would trade for just 16 times 2003 estimated earnings, an inexpensive multiple for a company growing operating results at a 15% clip. It currently trades for less than 20 times trailing 12-month results. We find the current valuation attractive, and believe that companies such as SCP Pool, that have delivered strong earnings and share price appreciation in both strong and weak economic markets deserve to trade at premium valuations. Based upon its current valuation of approximately $770 million, we believe that the company is likely to turn in yet another year of price appreciation for investors in 2003.
SVI Solutions Inc. (AMEX: SVI) $0.62
Since the holiday season is the critical time of the year for retailers, when stocks in the sector often rise, we thought now was the ideal time to begin coverage of SVI Solutions, a leading global provider of multi-channel application software technology and services for the retail industry. Inventory management is a critical part of success for retailers. In fact, Wal-mart’s inventory-tracking systems are often hailed as an integral part of the retailer’s success. SVI’s applications are designed to reduce the effort required to develop, test and maintain mission critical retail information software. Its Island Pacific division offers a complete suite of software applications to provide retailers with the ability to efficiently, effectively and profitably manage their corporate merchandising business processes. Island Pacific also provides direct to consumer e-commerce applications that support mail order, catalog and Internet channel retailing as retailers increasingly embrace multi-channel marketing.
The company, founded in 1988, has over 1,200 customers, including a "Who’s Who" of major retailers such as Home Depot, OfficeMax, The Limited, JCPenney, The Disney Stores, Victoria's Secret, and Toys "R" Us, among others. The company continues to pursue a strategy to become the leading global supplier of enterprise software solutions for the retail industry and a prominent developer of cutting-edge PC training courseware and testing tools. Through both organic growth and acquisition, the company has developed a comprehensive suite of industry-leading end-to-end solutions and has become more than a single source for retailers. Through acquisition, it has expanded beyond North America to Asia-Pacific and Europe. The company now has a variety of products to cross-sell to multiple customer bases, significantly increasing revenue potential.
SVI's solutions help to reduce operational costs at a time when leading retailers have come under unprecedented pressure due to a sluggish economy. Its solutions range from front-end Store Systems to back-office Merchandise Management Systems, as well as e-commerce and Customer Relationship Marketing applications. The recent evolution from a brick-and-mortar industry into a multi-channel environment with consumer access points ranging from stores and catalogs to web sites and kiosks has created the need for retailers to manage the full spectrum of transactions emerging from this new environment.
The company’s stock, which traded as high as $14.88 in November, 1999 started its decline after its founder Barry Schechter decided to step back from day-to-day operations by appointing new management in January, 2001, a decision that led to horrendous results for the company. SVI posted revenues for the first nine months of its fiscal year ended December 31, 2000 of $26.7 million. Since then, the company has posted declining sales and losses. For the first six months of its fiscal year ended September 30, 2002, the company reported net sales of $9.5 million, down from $15.5 million the year earlier. It also lost $4.3 million or $(0.15) per share, compared to a net loss of $7.1 million or $(0.19) per share recorded for year earlier time frame. Most importantly, Mr. Schechter has returned to spearhead the company’s operations as its CEO. The company decreased its operating loss by reducing costs and improving its balance sheet.
The company’s stock has traded in a relatively narrow range, although it is currently down 32% for the year. This gives the company a market capitalization of approximately $18 million, which means that the company trades at less than one times revenues. By contrast, JDA Software Group (NASDAQ: JDAS), which generated revenues of $166 million for the first nine months of its fiscal year, trades at approximately 1.5 times estimated 2002 revenues, despite issuing several severe profit warnings this year. JDAS’s stock has lost more than half of its value this year. We think that based upon current valuation, the return of the company’s founder and the company’s guidance that it will achieve significant second-half revenue growth and profitability by the end of its fiscal year makes the risk/reward equation quite attractive at current valuations.
PCTEL, Inc. (NASDAQ: PCTI) $7.04
There have not been many communications companies that have successfully maintained revenues and earnings in the current environment. However, PCTEL, a leading provider of innovative and cost-effective Internet access solutions is an exception. Its products include analog soft modems, DSP-based modems and WLAN software products that simplify installation, roaming, Internet access and billing. The company’s customers include Dell Computer, Toshiba, Sharp, Panasonic, Texas Instruments and Hewlett Packard, among others.
The company has been able to diversify its customer base this year, despite the challenges in the sector. Last year, 47% of its revenues came from one customer, creating significant risks for investors. This year, 82% of its revenues to date have come from six customers. It recently completed its first 802.11 software sale and has three additional contracts in place, creating a potentially lucrative new market for the company. Perhaps the best example of the turnaround that has occurred in its business can be seen in its third quarter results, where revenues increased to $12.5 million from $4.7 million in the quarter ended September 30, 2001. The company was able to achieve this despite employing 22% fewer people than last year. For the first nine months of its fiscal year, the company generated revenue of $32.4 million, down just 3% from the year earlier period. The company has earned $3.5 million for the first nine months of its year, a substantial improvement from a loss of $52.1 million during the 2001 period.
The company’s performance is even more impressive when it is compared with its competitors. Its gross margin of 60.2% is the highest in the industry, far exceeding competitors such as Conexant (44.8%), BroadCom (44.2%) and Agere Systems (14.3%). All three companies currently post substantial losses, while PCTEL is profitable. The company has achieved this result because it was able to execute its transition to the wireless market seamlessly. It has also been able to grow its modem business significantly. It realized that in order for it to stay in the commodity modem business that it would have to reduce costs dramatically, and it has done so. Its Segue™ solution has created a significant growth opportunity in the emerging area of 802.11 technology. The company’s strong patent portfolio should also give rise to significant licensing opportunities.
The company’s third quarter results substantially exceeded analysts’ estimates, as it earned 16 cents per share, much better than estimates for a 7 cent loss. The company has a strong balance sheet, with over $112 million in cash and cash equivalents. This gives the company an enterprise value of less than $30 million, when its cash position is subtracted from its market capitalization of approximately $141million. Other companies such as Conexant carry valuations nearly triple that of PCTEL, despite a 29% decline in revenue and substantial losses. Despite its relatively strong performance, PCTEL’s stock has declined 27.6% this year, hardly good news for investors. However, when compared with Conexant (down 88%), Broadcom (down 60%) and Agere Systems (down 77%), it has significantly outperformed its peers. Despite this, all three of these companies still trade for valuations that substantially exceed their cash positions.
We believe that PCTEL, which has rallied 58% since its mid-October low, provides investors with an attractive way to participate in the communications equipment sector. Since this area is likely to be the beneficiary of an improving economy, PCTEL, which has significantly outperformed its peers from both an operating performance and stock perspective, appears to be the best way to play this sector. We think that a combination of a recovering economy as well as the company’s continued improvement in operating results reflecting its transition to wireless makes this company an attractive investment candidate at current levels.
Cymat Corp. (TSX: CYM) $1.15
The current economic environment has been brutal for small companies, as a challenging economy and a lack of funding has made it difficult for these companies to execute their business models. This is why when a company with nominal revenues is able to raise $5 million ($8.35 million Canadian) we take notice. Cymat, a materials technology company that has exclusive worldwide rights for producing Stabilized Aluminum Foam, completed this capital raise last month. The company uses a process that combines alloyed aluminum with a metal matrix composite to create strong lightweight panels and shapes. The benefits of the technology include a high strength-to-weight ratio, mechanical energy absorption, recyclability and low cost of production.
How is the technology employed? It is used in a broad array of industries, including automotive, architectural and design, rail, defense, marine, truck and oil and gas. The company has principally focused on the automotive industry, where there is the potential for over 150 pounds of its Cymat SmartMetal™ material per vehicle. It already has developed significant relationships with OEM’s such as Valeo for Crash Boxes, Decoma for bumper systems and PSA Peugeot for Structural 3D casting. In total, it has agreements with 13 OEMs and forty Tier 1 companies, including DaimlerChrysler, General Motors, Fiat and Ford. The company has already completed testing with Valeo and has a targeted launch of the 2004 model year for its platform.
The company also has a development agreement with Decoma International, Inc. (NASDA: DECA), the world’s leading supplier of automotive exterior components and systems, to develop a new bumper system using Cymat’s proprietary technology. The bumper system will be designed to reduce the weight, provide for greater design freedom and improve the ability of vehicles to withstand crashes at varying speeds. The companies anticipate that full commercialization will occur by 2005. NASCAR also recently announced that it would use the company’s technology to improve driver safety. Such an agreement is likely to further increase the visibility of the company’s technology.
Cymat has also formed an agreement with PSA Peugeot Citroen, the second largest carmaker in Europe, to develop 3D aluminum foam casting targets to enhance the energy absorption of automotive structural components. PSA plans to incorporate Cymat’s technology to replace a sand core in a casting. The goal is to enhance the energy absorption of the component in a crash. However, the company’s technology goes beyond just automotive applications. It has focused on other areas as well, such as sound attenuation in mining, blast protection, road safety and clean rooms/security. One example is the relationship it has developed with Ceco Door Products. Under a three-year supply agreement, its aluminum foam panels will be used in positive pressure doors. It is working with Dynatec (TSX: DY), a leader in mining services, to develop accoustic dampening products.
Although the company’s revenues have been nominal to date, its Alusion division is expected to generate $1.5 to $3 million in revenues during the company’s fiscal 2003 year. Its near-term opportunities include wall cladding, furniture, shelving, fixtures and other design and architectural applications. It has already had installations in retail, entertainment complexes, condos and in the World Trade Center Memorial.
Despite the company’s stock losing 70% of its value this year, it recently completed a $5 million financing at a price of $1.25, slightly above where the company’s stock trades today. This values the company at approximately $53 million Canadian, on a fully-diluted basis. Many leading Canadian institutions participated in the transaction, suggesting that the company’s technology has significant potential. We agree, and believe that at the current level, upside returns for investors dwarf potential risks. We will have more on this promising company next week, after it announces its second quarter results for the period ended October 31, on October 18th.
Do you know of a company that deserves more coverage? Contact us at new@ceocast.com.
The CEOcast Newsletter is an electronic publication committed to providing our readers with factual information on selected publicly traded companies. All statements and expressions are the sole opinions of the editors and are subject to change without notice. A profile, description, or other mention of a company in the newsletter is neither an offer nor solicitation to buy or sell any securities mentioned. While we believe all sources of information to be factual and reliable, in no way do we represent or guarantee the accuracy thereof, nor the statements made herein. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. THE READERSHOULD VERIFY ALL CLAIMS AND DO ITS OWN DUE DILIGENCE BEFORE INVESTING INANY SECURITIES MENTIONED. INVESTING IN SECURITIES IS SPECULATIVE AND CARRIESA HIGH DEGREE OF RISK. THE INFORMATION FOUND IN THIS NEWSLETTER IS PROTECTEDBY THE COPYRIGHT LAWS OF THE UNITED STATES AND MAY NOT BE COPIED, OR REPRODUCEDIN ANY WAY WITHOUT THE EXPRESSED, WRITTEN CONSENT OF THE EDITORS OF CEOcast. Moreover, as detailed below, this publication accepts compensation from certain of the companies that it features. To the degrees enumerated herein, this newsletter should not be regarded as an independent publication. The profiles, critiques, and other editorial content of CEOcast may contain forward-looking statements relating to the expected capabilities of the companies mentioned herein. This information has not been independently verified by CEOcast. The reader should use caution, as a result. The following companies, featured in this newsletter, have compensated CEOcast: Silverado Gold Mines, forty-thousand dollars and one hundred sixty thousand shares of stock for a five-month program, BIO-Key International, seventy-five hundred dollars per month, plus options to purchase two hundred thousand shares at forty-two cents, Cepheid, seven thousand five hundred dollars, Orphan Medical, seven thousand five hundred dollars, Golden Eagle International, six thousand dollars per month, plus fifty thousand shares of stock per month, eResearchTechnology, seven thousand five hundred dollars, plus warrants to purchase twelve thousand shares at thirteen forty, Tri-Valley Corporation, six thousand dollars per month, Health Science Corporation, eighty thousand dollars for a two month program, Forbes Medi-Tech, seven thousand five hundred dollars, Penn Octane Corporation, six thousand dollars per month, twenty thousand shares of stock and warrants to purchase twenty thousand shares of stock at three dollars fifty five cents (our editors own sixty-four thousand shares as well), CareDecision, eight hundred thousand shares of stock from a third party, Flight Safety Technologies, seven thousand five hundred dollars, Ballistic Recovery Systems, seven thousand five hundred dollars, Contango Oil and Gas, seven thousand five hundred dollars, PHC, seven thousand five hundred dollars, Global Business Services, seven thousand five hundred dollars, SCP Pool, seven thousand five hundred dollars, SVI, Inc. twenty-two thousand five hundred dollars and fifty thousand shares of stock for a three-month program, PCTEL, seven thousand five hundred dollars and Cymat, seven thousand five hundred dollars.
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