Thursday, November 17, 2011

3S Bio ( Nasdaq - SSRX ) -- Clear Sailing

3S Bio (SSRX $12.00) reported excellent on target Q3 results.  Earnings advanced 53% to $.23 a share.  Sales improved 33% to $63.0 million.  3S Bio is a leading Chinese biopharamceutical producer.  Its two lead products are internally developed improvements on TPO, the breakthrough product invented by Amgen three decades ago.  Those products account for approximately 90% of total sales.  Applications are primarily in cancer treatment and dialysis, same as the original.  3S Bio is the leading provider in China because the company performed the necessary clinical trials there, and developed an effective direct sales force.  Last year 3S Bio quadrupled the size of its manufacturing facilities.  The expansion was certified by government inspectors early in 2011.  Depreciation charges and start-up costs impacted earnings in Q1.  Rising volume overtook those costs in the June period.  Further gains were realized in the latest period.

New products are in the pipeline.  3S Bio bought the Chinese rights to several candidates last year.  Clinical trials are underway.  Approvals could start to be obtained in 2014.  Meantime, the company has expanded its sales efforts in China.  The new health law curtailed prices somewhat in 2010.  But it also broadened the potential market.  The population in China is aging, reinforcing the trend.  3S Bio has begun to pursue international markets more aggressively, as well.  The company is addressing emerging markets like Turkey and Egypt with its low cost high performing products.  Exports represented 4% of the total in Q3, up 57% from the year ago quarter.

Fourth quarter results usually decline on a sequential basis.  A strong performance is likely all the same.  We estimate full year earnings will reach $.75 a share (+34%) on sales of $80 million (+26%).  R&D costs should expand in 2012 as the company's new products enter bigger rounds of clinical testing.  Gross margins might improve, though, as greater manufacturing efficiencies are realized.  3S Bio still is operating at less than 50% of capacity.  There aren't any upcoming reimbursement issues on the table, but another reduction might be enforced at some point as volume continues to build.  We estimate 2012 income will advance 20%-27% to $.90-$.95 a share on sales of $100-$105 million (+25%-31%).  New products could amplify performance over the long haul.  3S Bio is run by U.S. trained scientists and is well equipped to operate on the world stage without the state's helping hand.  As it becomes more entrenched Western drug companies might view it as an attractive distribution partner.

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Tuesday, November 15, 2011

Computer Modelling Group ( Toronto - CMG ) -- Turns the Corner on Schlumberger

Computer Modelling Group ( $13.50) reported excellent on target Q2 (Sept.) results.  The company is the leading provider of simulation software used by energy companies to maximize output at existing oil and gas fields.  Computer Modelling provides the industry's best mathematics and user interfaces, helping customers figure out the most effective way to exploit a target.  The industry originated in the 1980s with the advent of high performance computers made by Silicon Graphics.  Then Schlumberger and Landmark Graphics developed software that helped companies process seismic data and other information, so they could find promising areas to drill.  Landmark ultimately was acquired by Halliburton.  Computer Modelling came onto the scene in the 1990s with an emphasis on reservoir development, particularly in challenging applications like heavy oil and enhanced recovery.  The giants dominated the market through the mid-2000s and still control most of the so-called "black oil" segment today.  Those are the simplest fields to drill, like in Saudi Arabia.  There still might be some giant pools of sweet crude in the Arctic Sea.  Other than that, though, the easy stuff has been found.  These days new fields still have tremendous potential.  But they're locked into tar sands, and shale formations, and other difficult to exploit locations.  Demand for Computer Modelling's technology is accelerating as the energy industry has shifted its attention to those high potential but complex sites.

Earnings were flat at $.12 a share (excluding stock option expense).  Reported sales declined 10% to $12 million.  That doesn't sound too impressive.  But unit volume was up by approximately  20%.  Backlog expanded.  And a new product line with enormous potential finished up in R&D and will enter beta testing in Q3 (December).  Computer Modelling sells is software either on a perpetual basis or as an annual subscription.  In the latest quarter the perpetual component virtually disappeared.  Recurring revenues advanced 18%.  That figure was understated by 6%, moreover, since Computer Modelling reports results in Canadian Dollars but earns most of its income in U.S. money.  The looney went up in the period.  Costs were affected by the end of the company's relationship with "The Foundation."  That's a non-profit financed by 13 oil companies that had been paying 50% of Computer Modelling's new product development expenses. It also used to own 40% of the company's stock.  Those shares were sold last year.  The R&D payments ended in Q1 (June).

Not to worry.  Pretax margins remain above 50%.  And Shell and Petrobas each are continuing to finance 33% of the R&D project (as they have for the last five years), while granting Computer Modelling 100% ownership of the software.  That next generation "Dynamic Reservoir Modeling System" will allow operators to simulate all their above ground operations in addition to their drilling activities, maximizing a project's total return on investment.  Shell and Petrobas will get first shot at the technology.  But once commercialization begins, probably late in calendar 2012, Computer Modelling will retain any earnings without recourse.

Demand is accelerating.  Computer Modelling recently broke into the Middle East market (click on "Labels" below).  Business also is vibrant in South America, the U.S., Asia, and Africa as more heavy oil and other enhanced recovery type projects come on line.  Demand in Canada has plateaued for the time being due to the U.S. State Department's decision to block a pipeline designed to transport tar sand crude to refineries along the Gulf of Mexico.  Well financed operators in Canada are continuing to develop their properties.  But a number of smaller companies have scaled back.  An alternative pipeline to the West Coast is being contemplated, to send the heavy oil to China.

Shale oil and shale gas represent large opportunities.  A lot of shale operators originally eschewed simulation, figuring they couldn't miss.  Simulation has become increasingly popular with experience.  The technology is helping producers target wells more productively.  Demand is starting to jump as a result both in shale gas and shale oil plays.  The international shale market remains in an early stage of development.  But tremendous potential is believed to exist, particularly in Eastern Europe and China.  Computer Modelling is likely to benefit from the trend, similar to the way Carbo Ceramics has in the proppant industry.

We estimate income will rise 28% this year (March) to $.65 a share.  The exact number will depend on the split between perpetual and annual licenses.  Next year $.80 a share represents a realistic target.  Long term growth of 20%-30% appears sustainable, bolstered by the new DRMS product line.  Technology trends remain favorable.  Advances in parallel processing have made simulation software increasingly powerful and easy to use.  The trend towards hard to recover energy sources promises to reinforce demand.  Market share gains already are being realized.  The company's two main competitors, Schlumberger and Halliburton, have long viewed simulation as a complementary product line serving a niche market.  Customers still rely on those giants for a wide range of oilfield services.  Increasingly, though, they are selecting Computer Modelling's best of breed simulation technology.

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Friday, November 11, 2011

Points International ( Nasdaq - PCOM ) -- Margin Leverage on Tap

Points International (PCOM $9.00) reported excellent on target Q3 results.  The company is the leading provider of loyalty program services.  Consumer oriented companies that issue miles and reward points hire Points to provide ancillary services like "topping off" and moving credits from one account to another.  Most partners embed a link to the company's servers on their own websites, making it look like their own operation.  Points actually performs the work and updates all the related databases.  The company also operates its own portal, ""  Consumers can trade directly with other users on a computer based exchange system to get rid of unwanted miles for a carrier they can use. 

Margins tend to increase as volume expands.  Part of that relates to typical economies of scale.  Performance also benefits from rising commission rates after quotas are achieved.  Fully taxed earnings advanced 17% in Q3 to $.07 a share.  Revenues improved 23% to $28.8 million.  Two new products were introduced in the period, impacting profitability.  Those costs are slated to fall in Q4.  Better commission rates are poised to kick in, as well.  And while the summer is usually a slow period for promotional activity, most of Points's partners ramp up those efforts in Q4.  So revenues should expand sequentially.  Earnings are likely to accelerate on the rising volume and expanding margins.

We estimate income will finish at $.25-$.30 a share (+79% to +114%) on sales of $130 million (+36%).  Next year $.50 a share represents a realistic target.  Sales could advance 23% to $160 million.  The long term outlook is bright.  Above average gains could be realized well into the decade.  Points faces little direct competition.  And the loyalty program industry is continuing to expand as new companies enter the fray and existing participants figure additional ways of printing their own money.

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Wednesday, October 12, 2011

Points International ( Nasdaq - PCOM ) - Just Rewards

Points International (PCOM $9.35) is the leading provider of loyalty program services for the travel and retail industries.  The company offers a family of specialized products that airlines and other types of customers embed into their own websites.  Those features give users more options with respect to their miles and reward points.  Points invented the "top up" more than a decade ago in conjunction with American Airlines, allowing travelers to purchase extra points so they'd qualify for free flights, hotel rooms, rental cars, or other services and merchandise.  Users are diverted from the main website when making those requests to Points's specialized system, where the transactions occur.  Results automatically are fed back to the airline's computer system to keep its records up to date.  Points earns a share of the extra revenue generated.  Margins usually improve as volume thresholds are achieved throughout the year, although every contract is different.  Other products include the ability to combine multiple accounts into a single stack of reward points; and a vehicle to move points from one person's account to another's, usually a relative or business partner.  Points has deals with approximately 50 companies.  A majority of revenue still is provided by the airline industry.  But large new accounts are being added on a regular basis.  Recent additions include Best Buy and Pay Pal. is a stand alone website that allows users to manage multiple reward programs.  People can swap Delta miles for American miles, for instance.  Those transactions can be performed directly, usually at a steep discount; or on the company's trading platform, straight up with another user.  The website now represents just 5% of total revenue.  Awareness is starting to build, though, and some other Internet services the company is introducing could stimulate volume further in future periods.

The company launched a versatile rewards program for Internet retailers at the end of September.  The Incentify program sells generic points backed by the company to any online retailer that wants to establish a loyalty program.  Customers earn those points according to whatever formula the retailer wants.  Instead of be required to use the points with the same retailer customers can select from a list of partners that work with  (For example, a customer might purchase $200 worth of running shoes from an online store, and turn the generic points earned into 200 miles on Lufthansa.)  More retailer networks and partners are being recruited, laying the foundation for a possible Christmas surge in activity.

Meantime, the core business continues to grow rapidly.  Rewards programs have expanded under all kinds of economic conditions over the past two decades.  That trend is continuing in the current malaise.  Airlines earn billions each year from the programs.  Other industries now are catching onto the benefits of printing their own money, too.  Points earns a share of the transactions it participates in.  The company is enjoying enjoys organic growth in the 20%-30% range.  New customers continue to be added.  A computer system upgrade in 2010 expanded capacity and facilitated the development of new services.  The company faces no direct competition, moreover.  While margins will be constrained somewhat by the sheer economic pressure of dealing with huge corporate customers, earnings are likely to expand faster than sales well into the future as volume builds, the company's own Internet activities gain momentum, and additional services are created.

We estimate 2011 sales will advance 31% to $125 million.  Earnings promise to accelerate in the second half of the year as volume thresholds are exceeded on most contracts, providing a boost in margins.  We estimate fully taxed earnings will climb 114% to $.30 a share for the entire year.  Next year income could rise another 67% to $.50 a share on sales of $160 million (+28%).  A stronger showing is possible if the general economy doesn't experience a recession.  In 2-3 years income could attain $1.25 a share on sales of $250 million.  Applying a P/E multiple of 20x suggests a target price of $25 a share, potential appreciation of 165% from the current quote.

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Thursday, August 25, 2011

Computer Modelling Group ( Toronto - CMG ) -- Breaks Through in the Middle East

Computer Modelling Group ( CMG $13.00) reported excellent on target Q1 (June) results.  The company is a leading provider of reservoir simulation software that helps energy companies extract reserves most efficiently.  Its expertise is in heavy oil, tar sands, and other challenging deposits.  Competition is provided by Halliburton and Schlumberger, which provide software better suited to "black oil" reserves that are easier to lift.  Those companies are major energy service providers that enjoy strong marketing connections to many large customers, particularly national oil companies.  In the June quarter Computer Modelling made the largest sale in its history to a Middle Eastern national oil company, displacing Schlumberger.  The deal drove earnings up directly by 50% to $.18 a share.  Creation of such a prominent reference account could pave the way for transactions with additional Middle East customers in future periods. 

Demand from tar sand producers in Canada remains intact despite recent declines in worldwide energy prices.  Technology improvements, some provided by Computer Modelling, are keeping costs on a downward sloping curve.  Environmental objections are being overcome.  And construction of a pipeline to get the oil to world markets is likely to begin fairly soon.  The Canadian government would prefer to direct the pipeline to the United States.  The U.S. Environmental Protection Agency has raised a wide range of objections to the project, though, which probably won't be resolved before the 2012 election.  Whether the Canadians will wait that long remains to be seen.  The Chinese government appears willing to fund an alternative project ending at the west coast, the plan being to ship the oil across the Pacific.  Either way, production is likely to keep expanding in the Alberta tar sands region.

The "DRMS" offshore software project is nearing completion.  Shell and Petrobas provided two thirds of the funding for that effort, even though Computer Modelling will keep 100% ownership of the technology.  The two majors will get to use the software first, and they get the right to market it on a commission basis, as well.  Shell and Petrobas plan to test the software in their own operations starting in Q3 (December).  Commercial sales are expected to begin late next year.

For fiscal 2012 (March), we are raising our earnings estimate by a nickel to $.65 a share (+27%).  Excluding any DRMS contribution gains of 15%-20% appear sustainable in subsequent years.  If the company makes further inroads in the Middle East substantially faster growth could emerge.  The odds of that happening appear favorable.  The DRMS line is a wild card, but it too appears to offer terrific potential.  Downside risk is muted by the 4% cash dividend. 

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Monday, August 8, 2011

Computer Modelling Group ( Toronto - CMG ) -- Order Rate Improving

Stock price reflects 2-for-1 split.

Computer Modelling Group (CMG $10.75) appears on track to report excellent on target Q1 (June) results.  Orders for the company's energy development simulators remain vibrant, despite the recent decline in oil prices.  Project activity hasn't diminished in Canada.  And the company is continuing to make competitive inroads in other geographies.  Computer Modelling is the leading provider of reservoir simulation software for heavy oil, oil sand, and other challenging targets.  New discoveries are becoming increasingly more difficult to recover, boosting interest in the company's technology.  Financial results might be less dynamic than Computer Modelling's unit volume gains due to currency factors.  Most of the company's personnel (costs) are in Canada, while more than 70% of sales are priced in U.S. Dollars.  The Canadian currency has been relatively stronger this year, creating a negative translation effect.    Even so, pretax margins are likely to remain in the 45%-50% vicinity.

The DRMS software will enter beta testing in Q4.  That technology simulates the above ground operations at energy projects, allowing customers to maximize all aspects of the work, not just extracting the oil.  Petrobas and Shell are footing the bill for the development work and will get first shot at the software.  But Computer Modelling will retain all rights to the software and will be able to market it to anyone once it is commercialized in 2012.  Final work is focusing on integrating the simulators with customer databases and other computer resources, simplifying the user interfaces so engineers can use the technology without extensive training, and speeding up the processing speed even more.  In laboratory testing the new programs already run faster than the company's existing products.

Results will be affected by mix between perpetual and annual licenses.  Perpetual buyers spend more up front.  Annual deals generate higher recurring revenue.  Either way, the total number of licenses in force is poised to keep advancing.  Demand for oil is likely to remain robust at least for several more decades.  Computer Modelling is a key player in developing new reserves to meet that projected demand.  The new product line could amplify results further.  The shares remain a solid investment. 

Thursday, May 26, 2011

Computer Modelling Group ( Toronto - CMG ) -- Q4 Results

Computer Modelling Group (Toronto - CMG $28.00) reported Q4 (March) results that were below our expectation.  The company prices its energy simulation software either as a perpetual license or on a year to basis.  More customers elected the annuity format which provided less upfront revenue.  Unit volume was on target.  The recurring fees will enhance future reporting periods.  Earnings were down 10% at $.28 a share (excluding non cash stock option expense).  Sales were flat at $14.4 million (Canadian).  For the entire fiscal year earnings rose 16% to $.99 a share.  Revenues improved 14% to $51.8 million.   Consulting was the fastest growing segment, although it only represented 16% of total sales.  Computer Modelling has upgraded its technology substantially over the past two years, adding functionality that many users need help with to implement.  Those engagements usually lead to license sales.  License sales also are benefiting as different divisions within large companies adopt the technology. 

Long term growth promises to remain vibrant.  Almost all new energy discoveries are difficult to develop, and candidates for Computer Modelling's technology.  Halliburton and Schlumberger continue to offer simulators for conventional fields but have been unable to catch up in the high end segment.  Worldwide energy demand continues to rise, fueled by emerging economies.  And even at current price levels oil and natural gas provide far superior price performance compared to alternative sources.  A second line will be introduced later this year, focused on above ground facilities.  Those simulators will enable customers to maximize productivity for their entire projects.  The company is partnering with Petrobas and Shell.  Computer Modelling will retain all rights to the technology even though it only paid a third of the development cost.  Petrobas and Shell will get first crack at putting it to use.  Substantial leverage is possible by selling the new line to existing customers and bundling it with existing products when making new sales.

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Friday, May 13, 2011

3S Bio ( Nasdaq - SSRX ) -- Follow-up Report

3S Bio (SSRX $18.00) reported excellent on target Q1 results.  Sales advanced 28% to $18.1 million.  The rising Chinese currency accounted for 5% of that increase.  If the RMB keeps advancing against the U.S. Dollar further translation benefits will accrue.  Earnings dipped to $.15 a share.  Higher depreciation charges on the company's new manufacturing facility impacted profit margins.  That plant quadrupled 3S Bio's capacity, of which 30%-35% currently is being used.  The company also increased wages, hired more sales people, and lifted R&D spending on new drugs.  3S Bio additionally laid the groundwork to increase export operations, targeting emerging markets like Malaysia, Turkey, South Africa, and Egypt.  The company will take on Western pharmaceutical makers with lower cost alternatives.  3S Bio is one of the few companies in China that already has the ability to compete head to head with Western corporations on the world stage.  The combination of top notch science and low costs promise to fuel growth even after the government protections that help run of the mill Chinese companies fade over time.

Our 2011 estimates are unchanged.  Earnings could reach $.75 a share on sales of $80 million.  Margins should improve in upcoming periods as volume increases and costs stabilize.

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Wednesday, March 16, 2011

3S Bio ( Nasdaq - SSRX ) -- Follow-up Report

3S Bio (SSRX $15.25) reported better than anticipated Q4 results.  Sales advanced 40% to $15.3 million.  The company's two main recombinant DNA drugs led the charge, growing 40% and 53% respectively.  Those products accounted for 91% of total revenue for both the quarter and the full year.  Higher marketing and R&D costs prevented income from advancing as quickly as sales.  In fact, earnings declined 50% to $.08 a share in the period.  Most of the shortfall stemmed from a one time payment to acquire the Chinese rights to sell a promising anti-rejection drug being developed in Canada.  3S Bio also made an equity investment in the developer, and will finance a Phase III clinical trial in China later in 2011.

Growth in the core business remains vibrant.  A new manufacturing facility came on line in 2010, expanding capacity by 300%.  The government's new national health insurance law is boosting patient coverage.  And while price controls limit 3S Bio's revenue potential, those regulations are accompanied by approved supplier lists that reduce competition, as well.  Several new products are in the pipeline, which could leverage performance in future years.  Cash reserves exceed $100 million.  So additional deals with non-Chinese drug companies are a possibility.

We estimate sales will improve 26% in 2011 to $80 million.  Earnings could rise 34% to $.75 a share as volume builds at the new facility and R&D costs level off as a percentage o sales.  3S Bio remains well positioned to thrive in China's still evolving health care industry.  The company is preparing to expand outside the country, as well, which should demonstrate it's ability to compete without government protection. 

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Sunday, February 20, 2011

Computer Modelling ( Toronto - CMG ) -- Follow-up Report

Computer Modelling (CMG $25.00) reported Q3 (December) results that were somewhat below our expectation.  The main reason for the shortfall was a higher concentration of annual software license sales compared to perpetual licenses.  The company gives customers a choice of payment plans.  More took the year to year approach in the December period, requiring a lower upfront outlay.  Non-GAAP income slipped 9% to $.21 a share.  (All figures are shown in Canadian Dollars.)  Revenues increased 3% to $12.1 million.  Deferred revenue increased 17%, presenting a more accurate picture of the company's underlying growth rate.  Product development and marketing costs expanded in the period, pressuring margins to a degree.  Pretax income remained at 47% of sales.  The R&D line went up as Computer Modelling began putting on the final touches to its next generation software line.  Sales from that product will pyramid on top of the company's existing packages.  Computer Modelling improved its current products, as well, separating itself even further from the competition.  Selling efforts in the Middle East haven't borne fruit to date.  Political uncertainty may slow down those initiatives.  But new petroleum finds are becoming increasingly complex to analyze, even in the Middle East.  Demand is likely to emerge because Computer Modelling's software has been proven superior to Schlumberger's by a wide margin in those kind of applications.

We are maintaining our full year (March) earnings estimate at $1.10 a share.  The trend towards annual licenses may continue, in which case a lower number probably will be reported.  Those deals would lay the groundwork for greater recurring income in the future, though.  Rising energy prices promise to bolster demand over the intermediate term.  Tar sands, shale oil, shale gas, deep offshore, heavy oil, and other complex formations are where the action is when it comes to new discoveries.  As those fields get the go ahead demand for Computer Modelling's software is sure to follow.  The pipeline fiasco now afflicting the U.S. oil market may exert a slight restraint on activity.  But the U.S. has become one of the company's smaller markets, so the net impact shouldn't amount to too much.  Reported results also will be effected negatively if the U.S. Dollar declines materially, since two thirds of revenue is denominated in that currency while most costs are paid in Canadian Dollars. 

Financial results could accelerate sharply after the new software line is introduced.  The technology was field tested last year.  The software currently is being enhanced to run faster with better user interfaces.  Commercial launch is expected later this calendar year.  With a major new product in the wings, demand still growing rapidly for the company's core product, and no direct competition in sight, these shares continue to hold exceptional appreciation potential.  Meantime, the shares are yielding a 3%-4% cash dividend.

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Saturday, January 15, 2011

Computer Modelling Group ( Toronto - CMG ) -- Follow-up Report

Computer Modelling Group (CMG $25.00) appears on track to report excellent on target Q3 (December) results.  The company is the leading provider of simulation software used by energy producers to exploit heavy oil, tar sand, and other complicated reserves.  Computer Modelling is gaining market share from Schlumberger, which still leads in the conventional market, because most of the easy to produce oil already has been found.  New discoveries are increasingly complex and require the company's high performance software.  Demand is rising across the board in response to escalating petroleum prices, which recently climbed above $90 a barrel.  Anything higher than $75 per barrel generally causes the pace of exploration to gain momentum.  Business remains vibrant in Computer Modelling's established markets.  The company has started to penetrate new accounts, as well, which used to rely exclusively on Schlumberger or their own internal technologies.  Geographic expansion is materializing, too, in response to beefed up marketing efforts.  Schlumberger has not responded with competitive high end products yet, and it appears that a major development effort is not underway.  Start-up competition has not emerged, either, and the likelihood of anyone new catching up at this point has become a dim prospect.  Computer Modelling is applying the finishing touches on a more comprehensive next generation system, which promises to lengthen its competitive lead after it is commercially introduced, perhaps as early as 2012.  Meantime, orders are pouring in as the energy industry prepares for a sustained increase in petroleum demand as the Third World matures over the next few decades.  Income is poised to keep rising at a fast pace.  Much of that is likely to be paid out as cash dividends, moreover, providing shareholders with a superior return comprised of both income and appreciation.

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