Wednesday, August 15, 2012

3-S Bio ( Nasdaq - SSRX ) -- Sales Force Drives Growth

3-S Bio (SSRX $11.25) reported excellent better than expected Q2 results.  Product prices were similar to the year ago period.  Unit growth propelled sales higher by 31% to $28.1 million.  Earnings advanced 38% to $.29 a share.  3-S Bio's leading product maintained its market share at 40%-43%, suggesting robust expansion by the industry overall.  A new product was purchased in the quarter, which will head into general distribution in the September period.  Another product entered Phase 3 clinical trials.  Exports rose 85% and represented 5% of sales.  Volume gains are likely to continue in upcoming quarters as the big increase in sales reps added in 2010 and 2011 continue to improve performance.  More hiring is underway.  The sales force probably will keep growing at least at a 5%-10% pace.  We have raised our 2012 earnings estimate by a nickel to $.95 a share to reflect the sturdy Q2 showing.

Government mandated reimbursement cuts are likely in the September quarter.  China implemented a wide ranging health plan in 2010.  A key trade off for industry participants has been a big increase in the number of people covered in exchange for lower prices.  Another round of price reductions is expected.  The specifics will vary depending on a variety of factors.  But 3-S Bio anticipates an average hit of 10%-20%. 

Manufacturing margins currently are nearly 90%.  That's typical of drug companies around the world.  3-S Bio expanded capacity threefold in 2010 to meet the expected rise in demand the new health care envisioned.  The company still is operating at 50%-60% of capacity.  While margins will be impacted by the upcoming price reductions, rising volume promises to offset the full effect.  More efficient sales operations could alleviate the pressure on margins, as well.  And 3-S Bio is actively seeking additional products to feed through its distribution network.  Meantime, exports to emerging markets like Turkey and Egypt are growing quickly due to the products' efficacy and relatively low price points compared to American and European offerings.

We have reduced our 2013 earnings estimate by a dime to $1.05 a share.  That figure assumes the upcoming reimbursement changes will approach the high end of the range.  A somewhat stronger performance is possible if the cuts prove less severe than expected.  Downside risk remains modest.  The stock trades close to book value ($9.45 a share).  Cash and equivalents total $124 million ($5.62 a share).  The Chinese population is aging quickly, suggesting above average industry growth for an extended time.  A joint venture with U.S. based Davita to run a network of kidney dialysis centers promises further leverage.  That project is slated to start rolling out next year. 

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Thursday, August 9, 2012

Sevcon ( Nasdaq - SEV ) -- Legacy Business Slows

Sevcon (SEV $5.00) reported lower than expected Q3 (June) results.  The company is the leading independent provider of computerized controls for electric vehicle engines.  Revenues increased 8% to $8.88 million.  Earnings fell 75% to $.01 a share (fully taxed).  Engineering talent was added in the period to support anticipated growth.  Margins were crimped when revenues grew less rapidly than predicted.  Rising expenses were offset to a degree by better manufacturing margins.  Sevcon outsources most production work.  The entire supply chain demonstrated improving productivity. 

Industrial vehicle demand slowed due to economic considerations.  Sevcon provides the brains for a wide range of electric powered work machines.  Those include fork lifts, aerial lifts, mining vehicles, airport trucks, floor polishers, turf equipment, and a variety of other units.  The company's technology maximizes battery efficiency so the engines can hit higher speeds and last longer before recharging.  Before the recession began sales in that segment were pushing $40 million a year.  Rising energy prices and tighter environmental rules promised to support further gains.  Demand collapsed when the worldwide economy slowed.  A rebound appeared to be underway.  But the latest woes in China, Europe, and elsewhere put the brakes on that during the June quarter.

The on-road market continued to advance.  Sevcon entered the electric car segment a few years ago, building on technology it already was delivering for motorcycles and all terrain vehicles.  Bolstered by government regulations, but primarily economics, the electric car market has been expanding rapidly and is continuing to go.  Rising fleet fuel efficiency standards are accelerating demand among auto makers.  But consumers are clamoring for the product, too.  Based on the size of the worldwide car market, which is mammoth, and the regulatory path that's in place, and growing consumer support, there's a strong consensus among industry observers that unit volume could expand 25%-35% annually over the next ten years.  A recent deal to supply controls for Renault's new "city car" is generating near term momentum.

Sevcon is well positioned to grow even faster in the on-road segment.  Even if it doesn't, though, overall performance should be reinforced by a return to normal by the industrial segment.  That would entail a 100% jump just to get back to to 2007 levels (an extra $20 million a year in sales). 

These shares require a long term orientation.  The share count is so low, however, and the potential market is so big, a patient investor could enjoy enormous appreciation.  A rebound by the economy likely will drive conventional energy prices higher, making electric cars increasingly attractive.  In 2-3 years income could attain $.75 a share.  Applying a P/E multiple of 20x suggests a target price of $15 a share, potential appreciation of 200% from the current quote.  Beyond that, it might be a long runway.

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Wednesday, August 8, 2012

Points International ( Nasdaq - PCOM ) -- Gears Up

Points International (PCOM $13.00) reported excellent on target Q2 results.  Earnings advanced 233% to $.10 a share (fully taxed).  Revenues improved 11% to $36.4 million.  All of the revenue increase was provided by existing customers.  Points is the leading independent provider of loyalty program services used by airlines, hotels, car rental companies, banks, and retailers.  The company's software enables customers to manage their loyalty accounts with a variety of features, like purchasing or exchanging miles and points.  Several large new deals are in the pipeline.  Implementation work is underway.  Formal roll outs are slated for the December quarter. 

Our estimates assume only a $5 million revenue contribution from those contracts in 2012.  If they all come to fruition next year the incremental revenue boost could be in the $50 million range.  The company is actively pursuing additional partners, moreover.  It thinks about 25%-30% of the potential market has been penetrated to date.  And direct competition is incidental.  Most alternatives entail in-house computer systems.  Product enhancements are being developed to lift revenues at existing accounts.  Points International revamped its technology platform in 2011 to facilitate the creation of new features.  It also makes it easy to take ideas that are working with some customers and roll them out to the rest of the base.  A move into mobile applications promises further leverage over the long haul.  Our estimates are unchanged.

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Computer Modelling ( Toronto - CMG ) -- Positive Outlook

Computer Modelling ( $18.00) reported excellent on target Q1 (June) results.  The company is the leading provider of reservoir simulation software used by energy producers to retrieve heavy oil and other difficult deposits.  Licenses are sold on an annual and perpetual basis.  The latter are more unpredictable.  Most customers renew the annual licenses at a high rate.  In the June period perpetual sales dipped compared to the year ago, holding the overall year to year revenue gain to 3% ($16.5 million).  Annual revenues ($13.2 million) climbed 46%, however.  Non-GAAP income slid 6% to $.17 a share.  A large perpetual contract was finalized in early July.  Additional large contracts are in the pipeline.  Perpetual business is likely to rebound to normal levels, leveraging the sustained growth in annual licenses.  We are maintaining our full year earnings estimate at $.80 a share. 

The next generation DMRS software program appears to be back on track.  Computer Modelling is developing that technology in conjunction with Shell and Petrobas.  The giant companies' engineers steered the effort in a highly technical direction that made it hard for end users to operate.  Computer Modelling stepped in during the June period to shift gears towards a more user friendly format.  The streamlined software is functioning better.  And a less complicated user interface is being implemented.  Field testing is likely to start before long.  Commercial sales are expected by the end of next year.

Competition continues to fall behind.  Schlumberger has begun giving away its software, to little avail.  Halliburton recently licensed Computer Modelling's offering for shale gas applications.  There are a handful of small niche software providers but nobody measures up to the company's expertise and customer support.  Margins are likely to remain elevated.  Growth is poised to be sustained at above average rates.

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Tuesday, August 7, 2012

Foraco ( Toronto - FAR ) -- Order Rate Moderates

Foraco ( $4.00) reported excellent on target Q2 results.  Bolstered by an acquisition (51% of Brazil based Servitec) revenues improved 36% to $106.6 million.  Organic growth was 19%.  Non-GAAP income widened 33% to $.12 a share.  That improvement was impacted a higher tax rate, which is likely to persist in upcoming periods.  More work is being performed in higher tax countries.  Foraco maintained its operating rate at 76% in the quarter.  The rig count increased by six to 290 altogether.  Pricing was little affected because most work was performed under long term contracts.  Some activity was delayed, however, due to weak economic conditions.  The next round of bidding is slated for the fall.  Preliminary indications suggest order rates will moderate, although growth is likely to be sustained in most key mining regions.  Price hikes probably are a lost cause but significant discounting isn't anticipated.  Foraco remains the industry's high end leader. 

We are lowering our 2012 earnings estimate by a nickel to $.50 a share.  Higher taxes and slightly reduced margins likely will prevent income from accelerating sequentially over the rest of the year.  The new unit in Brazil could deliver some countervailing impetus, though.  We've reduced our 2013 estimate by the same amount to $.60 a share, reflecting the muted outlook.  Foraco is poised to benefit no matter which way the industry turns.  If China and other emerging nations lift commodity demand, earnings should improve directly.  And if conditions stay depressed, attractive acquisition opportunities could emerge. 

In 2-3 years income could reach $.75-$.95 a share.  Applying a P/E multiple of 12x to the midpoint of the range suggests a target price of $10 a share, potential appreciation of 150% from the current quote.

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