Pure Technologies ( Toronto - PUR ) -- Water Tight

Pure Technologies (PUR.to $7.00) is the leading provider of inspection and monitoring services for water utilities to identify and repair leaks in a cost efficient manner.  Traditional methods are imprecise and often require large sections of pipe to be replaced.  Pure's systems zero in on problem areas, allowing remediation to be performed more inexpensively.  To date the company has focused largely on large diameter pipelines made from prestressed concrete.  Those are steel cylinders wrapped in heavy wire, and then coated with concrete both on the interior and exterior.  Problems occur when the wires begin snapping.  Pure supplies a variety of acoustic technologies that identify where those breaks are occurring, allowing repairs to be made at that specific location.  Prestressed concrete trunk lines (water delivery and waste water) account for approximately 3% of the installed base of water pipes.

Last fall Pure expanded its addressable market 20x by introducing technologies aimed at metallic pipes.  The same basic approach was applied to the problem.  Several types of instruments with fiber optic communication lines or radio transmitters monitor the pipes, creating a data baseline.  When anomalies are picked up more testing is sent to the area to clarify the problem.  Metal pipes have different characteristics.  They also are more complicated than the large trunk pipelines, requiring listening devices that are more maneuverable and less likely to get stuck.  The pipe's diameters are smaller, there are more twists and turns, and numerous valves and other obstacles stick out along the way.  Orders already have responded to the new metallic pipe technologies.  Existing customers are expanding adoption.  New customers are signing up.

Recurring revenues now account for a majority of Pure's business.  Sales of equipment represents approximately 33% of sales.  Those are the listening devices that water utilities employ to watch their systems.  Most of the rest is generated by consulting, inspection, and monitoring services.  Service income has been advancing sharply in North America.  A contract with the Libyan government has masked that improvement, though.  The company had a substantial contract in Libya prior to Colonel Gaddafi's overthrow.  That relationship stopped in its tracks after the revolution, mainly due to a lack of funds.  The project -- bringing water from a desert oasis to the cities -- remains operational, albeit at inefficient levels.  The company collected a large receivable in 2012, throwing off year to year comparisons.  New business remains at a standstill, though.  Pure is optimistic a revival will occur some day in the future.

Meantime, demand is accelerating.  In addition to water Pure generates about 5% of revenue from oil and natural gas pipelines.  That figure likely doubled in 2013 and could expand further in the year ahead.  Several new customers recently were added in the North American water utility market, moreover.  Competition is provided mainly by large engineering contractors which typically replace large sections of pipe when problems are discovered.  Pure's systems offer a more affordable alternative.  Cash strapped agencies are becoming increasing receptive to the company's targeted approach.  Expansion into the metallic pipe area is providing additional leverage.  Technical employees are being added at a fast pace to support the build up in demand.  New products are slated for introduction this summer.  Details have not be revealed.  But important new features are likely to be added to existing hardware platforms, allowing customers to upgrade without disruption.

International markets are coming to life.  Pure has started working with several Far East utilities.  A new software platform has been developed to facilitate that effort, helping the company coordinate its consulting efforts more efficiently.  Pure also is beginning to pursue smaller North American utilities.  The same software platform ("PureNet") is expected to provide lower cost design and monitoring services to those users, as well.

December period results likely were solid.  Performance tends to decline sequentially because water demand is high in the period.  Maintenance efforts often are pushed back unless essential.  For the year we estimate income rose 20% to $.12 a share, despite the Libya setback.  Sales likely increased 8% to $63 million.

In 2014 the Libya distortion will be eliminated.  We estimate earnings will improve 67%-100% to $.20-$.24 a share.  Sales could reach $80-$85 million, up 27%-35%.  Further margin expansion is possible in subsequent years as recurring revenues accumulate and sales in general are spread over a less rapidly rising base of overhead costs.  Acquisitions of complementary technologies could yield additional leverage.  The initiation of a cash dividend is possible.

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Silicom ( Nasdaq - SILC ) -- Big Data Yields Big Growth

Silicom (SILC $60.00) reported better than expected Q4 results.  The company is the leading provider of auxiliary products used in server farms to improve performance and reduce costs.  Volume responded in the period as several programs achieved broader distribution.  Sales advanced 52% to $25.4 million.  Earnings jumped 104% to $.94 a share.  Overhead costs were spread over a higher than predicted level of sales, propelling pretax margins to 28% in the quarter.  The trend towards cloud computing amplified demand.  Customers rely on Silicom's technologies to offload routine tasks onto special purpose cards, enabling their servers to accommodate more traffic.  A recent acquisition promises to reinforce that trend in upcoming periods.  That technology (data virtualization) helps cloud computing data centers manage huge information repositories more efficiently.  Meantime, Silicom's core technologies are continuing to proliferate into more systems.

Silicom is co-opting its only true competitor, Intel Corp.  The giant chip maker used to provide some of the technologies that Silicom offers as a bundled feature in certain semiconductor products.  In December Intel signed a deal with Silicom to work together on a series of new offerings.  Further collaboration is possible down the road if Intel elects to rely on Silicom's industry standard products instead of reinventing the wheel themselves.  The only other direct competition that Silicom currently encounters is from in-house design teams.  Many manufacturers of specialty computers still attempt to design 100% of the functionality of their products internally.  Silicom increasingly is replacing those efforts when new products are developed.

Several factors promise to sustain growth at a superior rate.  The industry itself is continuing to expand.  Big data, mobile, and cloud computing are expanding much more quickly than the computer industry as a whole.  Silicom already is well entrenched in those segments.  The data virtualization expansion is likely to reinforce that momentum.  Unit volume in existing programs should benefit directly.  Silicom also is adding new customers.  Over 90 companies currently rely on the company's technologies to some degree.  And those customers are engineering Silicom's technologies into a greater number of new designs.

We estimate 2014 sales will surge 25%-35% to $90-$100 million.  Income, excluding the affect of non-cash stock option expense, could reach $2.75-$3.25 a share.  Cash flow remains positive.  Silicom has expanded inventory levels to ensure the best possible response time when customers place orders.  Even so, a hike in the cash dividend is possible.  There's plenty of cash on hand, moreover, to purchase additional technologies.

Note - Older reports about Silicom can be found in the "Archives" in the "Israeli Growth Stock" section, which appears at the end.  Those companies now are followed in this blog, "International Growth Stocks."

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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

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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