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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