Computer Modelling Group ( Toronto - CMG ) -- Momentum Continues

Computer Modelling Group (CMG.to $17.75) reported excellent on target Q4 (March) results.  Non-GAAP earnings advanced 36% to $.19 a share.  Revenues improved 20% to $17.2 million.  All figures are in Canadian dollars.  Perpetual software license revenue declined 13% to $3.4 million.  That segment tends to bounce around from period to period.  Annual subscriptions generally are more consistent.  That segment was responsible for the quarter's growth.  The next generation DRMS software project experienced technical problems and probably won't be launched for another two years.  Computer Modelling is working with Shell and Petrobas on that effort.  Meantime, though, the company's core reservoir simulation line is continuing to build momentum.  Computer Modelling is the leader in the hard to recover end of the market, which is the industry's fastest growing area.  Fiscal 2012 (March) earnings rose 30% to $.65 a share.  Revenues improved 18% to $61.0 million.  Our fiscal 2013 estimates are unchanged at $.80 a share and $70 million, respectively.  The quarterly cash dividend was increased to $.16 a share.  An extra $.10 a share will be paid in June.

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3-S Bio ( Nasdaq - SSRX ) -- Unit Volume Rises, Costs Decline

3-S Bio (SSRX $13.25) reported excellent on target Q1 results.  Sales climbed 24% to $23.4 million.  Earnings surged 53% to $.23 a share.  Selling prices were generally unchanged compared to the December period, although they did decline 3%-5% from the year ago quarter.  Volume remained robust despite the fact prices probably will be forced lower by new Government regulations.  Those have not be formalized yet but are expected to go into effect in Q2.  In theory, customers could have waited for the prices to fall before purchasing in Q1.  China established its own health reform law in 2010, expanding coverage to most of the country.  The quid pro quo with the health care community has been one of greater volume in exchange for lower prices.  The upcoming round could see 3-S Bio impacted by 5%-10%.

Margins held up well after prices were reduced last year.  3-S Bio built a series of new manufacturing facilities which came on stream in 2011.  Modernized equipment and procedures enabled the company to cut production costs directly.  Depreciation expense jumped in the short run, though, since the new facilities were 4x larger than the former site.  The company now has ramped up volume sufficiently to achieve 50% capacity utilization rates.  Further cost reductions are possible, suggesting overall margins will remain attractive despite the Government's upcoming price cuts.

Marketing efforts are accelerating.  3-S Bio plans to boost its distribution channel by 20%-25% this year, with an emphasis on penetrating second tier hospitals.  Those customers are exhibiting the fastest growth as the health law kicks in.  The company also recently formed a joint venture with U.S. based Davita to set up a chain of dialysis centers in two Chinese provinces.  That deal is likely to begin contributing early next year.  New products are in the pipeline, moreover.  And export operations are picking up momentum.  A new version of the company's top selling drug will enter clinical trials this year.  Other trials are approaching the finish line.  Those include products licensed from international companies for sale in China.  3-S Bio's new facilities also are being fine tuned to make generic biological drugs.  Those are off patent biotech products that offer huge potential but even western companies find challenging to make.  Exports remain focused at high population mid range countries like Egypt and Turkey which need high quality products at affordable prices. 

Our estimates are unchanged.  A stronger performance is possible if the next round of Government price reductions come in at the low end of the anticipated range.  The long term outlook remains bright.  3-S Bio is well positioned to expand in China without government help.  Its world class scientific talent promises to attract additional foreign partnerships.  Finances are solid.  And for a bunch of scientists, the management has a proven track record when it comes to marketing pharmaceuticals.

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Sevcon ( Nasdaq - SEV ) -- Scaling Up

Sevcon (SEV $7.25) reported excellent on target Q2 (March) results.  Earnings improved 8% to $.14 a share.  Sales expanded 30% to $10.1 million.  The company is a leading provider of drive train controls for electric vehicles.  In the past Sevcon emphasized the off road market.  That segment was hit hard by the recession and remains far below historical levels.  The company has been picking up the slack with on road programs including scooters, bikes, and small city cars.  Those are niche markets as far as the automobile industry is concerned.  So the big drive train producers haven't participated in those markets in a meaningful way to date.  Sevcon is taking advantage of its opportunity to cultivate a number of relationships that could become substantial contributors over the coming decade.  It also recently formed a manufacturing relationship with outsource giant Flextronics to ensure it can meet higher levels of production if demand suddenly arises.  Sevcon is establishing an arsenal of engineering know how that promises to yield additional contracts in the future.  Profits are rising in the meantime as the off road business recovers and the new programs kick in.  The electric vehicle market holds ample potential even if it remains a niche business.  If new battery technologies are developed the industry could expand dramatically in the future, propelling Sevcon to substantially higher levels of business activity.

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Foraco ( Toronto - FAR ) -- Growth Intact

Foraco (FAR.to $4.85) reported excellent on target Q1 results.  Earnings climbed 50% to $.12 a share.  Sales improved 35% to $88.2 million.  Utilization rates improved by one percent to 71%.  Pricing improved, as well.  Backlog expanded in the quarter, setting the stage for additional gains in future periods.  Foraco purchased 51% of Brazil-based Servitec at the end of April.  That operation will be consolidated for two months in Q2.  A modest financial lift is expected right away, with bigger contributions possible down the road.  Incoming orders remain robust despite the recent drop in commodity prices.  Foraco drills exploratory wells for mining companies to delineate prospective deposits.  That work tends to be less volatile than actual production.  Further gains appear likely in 2013 as Foraco capitalizes on its expanding backlog and the Servitec business builds momentum.  Longer term, the company's niche water drilling business could become a more significant contributor.

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Points International ( Nasdaq - PCOM ) -- Improving Pipeline

Points International (PCOM $12.50) reported good Q1 results.  The company is the leading provider of loyalty and rewards programs for the travel and hotel industries.  That segment generates 70% of revenues.  New markets like retailing, financial services, and gambling provide 25%.  Points also operates its own on-line exchange where consumers can swap points from different programs, i.e., Lufthansa miles for American Air miles.  That business delivers the remaining 5% of sales.  Promotional activity by airlines and hotels tends to increase in Q2 and Q4, which in turn drives additional volume the company's way.  The period just ended was typically slow due to that seasonal influence.  Points didn't start any major new programs in the quarter, either.  So comparisons were relatively muted.  Sales actually declined 2% to $28.0 million.  Non-GAAP earnings doubled to $.06 a share.

Points has more than $50 million of new annualized business in its sales pipeline.  The company has a high degree of confidence the contracts will be signed this year.  But if most are implemented late in 2012 the revenue contribution probably won't become meaningful until the year following.  We have reduced our full year sales estimate by $10 million to $150 million, which reflects the amount of volume Points expects to generate with its existing book of contracts.  We also have lowered our earnings estimate by a nickel to $.45 a share.  Sales could accelerate in 2013 as the new contracts come on line and existing accounts keep expanding.  New Internet products launched in mid 2011 could yield further leverage.  We estimate sales will hit $200 million to provide income of $.75 a share. 

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