Tuesday, June 11, 2013

Coastal Contacts ( Nasdaq - COA ) -- Loses Focus

Coastal Contacts (COA $4.75) reported Q2 (April) results that were significantly below our expectation.  The company is a leading provider of contact lenses and eyeglasses, sold over the Internet.  Contact lenses account for 2/3 of revenues, but the greatest growth potential lies in the virtually untapped eyeglass segment.  Contact lens sales slowed modestly from the immediately preceeding quarter.  But that was a normal fluctuation influenced by re-order timing.  The overall trend remains intact.  Eyeglass sales, on the other hand, were much slower than anticipated.  Pricing increased, an indication that promotional discounts were relied upon to a lesser extent.  Even with that adjustment volume should have been considerably higher.  Coastal Contacts raised $20 million in fresh equity earlier in the year.  About 25% of that was spent in the April quarter to accelerate growth.  It could be the extra spending will produce higher results in the current quarter.  Demand is likely to be reinforced by a wider selection of brand name frames and sunglasses, and a more streamlined website.  Coastal Contacts elected not to provide a sales forecast, though, so there remains considerable doubt about what the immediate future will bring. 

The long term outlook remains positive.  The on-line eyeglass category holds enormous potential.  Even if only 10% of the eyeglass market goes to the Internet that business will equal the on-line contact lens industry.  Coastal Contacts faces competition at the high and low ends.  But the company remains the leader in the mid-range segment.  Downside risk is limited by the company's acquisition potential.

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3-S Bio - Acquisition of the Company is Complete

Monday, June 10, 2013

Computer Modelling Group ( Toronto - CMG ) --

Computer Modelling Group (CMG.to $23.00) reported excellent on target Q4 (March) results.  The company is the leading provider of simulation software used by energy companies to maximize production of heavy oil, tar sands, and other complex reserves.  Customers purchase the technology either on a perpetual basis or year to year.  Perpetual licenses generate more immediate revenue.  Deals that renew annually tend to yield greater lifetime income.  In the latest quarter Computer Modelling booked fewer than normal perpetual deals, resulting in a muted year over year comparison.  But recurring revenue improved by 23%.  Earnings increased by a penny to $.20 a share despite the 33% decline in perpetual license sales.

Demand remains vibrant.  Computer Modelling continues to fare best in the North American market.  Activity in Calgary and North Dakota is continuing to expand at a superior pace.  The U.S. oil fracking market is thriving as costs come down, helped in growing measure by broader software use.  Tar sand costs are falling, as well.  Each of those areas is believed to possess potential reserves that are bigger than Saudi Arabia's.  A price collapse in the oil market remains a significant risk.  In theory worldwide demand for petroleum should be exploding as Third World countries modernize their transportation systems.  The ongoing recession has muted demand, though.  And most OPEC producers depend on their oil income, making it unlikely they'll cut production.  Prices have held up so far because the Obama Administration has virtually eliminated Iran from the picture.  The U.S. and Canada have picked up the mullahs' market share.  Further output increases could start putting pressure on prices, though, unless economic activity rebounds.  Fracking and tar sand costs are declining, so a bigger cushion is being created.  But a big acceleration in sales probably won't emerge until unit volume demand accelerates, forcing energy producers to develop even more challenging fields. 

Natural demand promises to advance in the Middle East.  That's been Schlumberger's province for decades.  And the French oilfield services giant probably will continue to supply a sizable share of the software market over the long haul due to its tight customer relationships.  But even in the Middle East oil has become increasingly difficult to recover.  Computer Modelling has the best technology for exploiting difficult reserves.  The company already is working with Halliburton in North America.  If worldwide demand takes off Computer Modelling could make some direct forays in the Middle East as those kingdoms try to rebuild their own reserve bases.  A collaboration with Schlumberger, while it's unlikely at this point, could develop.

The company's next generation system is slated for launch in the December quarter.  That project was funded equally by Shell and Petrobas, which also supplied part of the engineering team.  Computer Modelling retains exclusive ownership and marketing rights to the technology.  Shell and Petrobas get first shot at using the software.  It should be a pretty big deal.

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